
Class il!Bj_7i. 

Book ' 3 

Ci2£miGHI fi£H)Sm 



OUTLINES OF ECONOMICS 



THE UNIVERSITY OF CHICAGO PRESS 
CHICAGO, ILLINOIS 

THE BAKER & TAYLOR COMPANY 

NEW YORK 

CAMBRIDGE UNIVERSITY PRESS 

LONDON AND EDINBURGH 



OUTLINES OF ECONOMICS 



PREPARED BY 

MEMBERS OF THE DEPARTMENT OF POLITICAL 

ECONOMY OF THE UNIVERSITY 

OF CHICAGO 



THE UNIVERSITY OF CHICAGO PRESS 
CHICAGO, ILLINOIS 



:^ 



^\ 



%^<^ 



Copyright 1910 By 
The University of Chicago 



All Rights Reserved 



Publisljed September 19 1 



Composed and Printed By 

The University of Chicago Press 

Chicago, Illinois, U.S.A. 



CIA273;^1K> 



This outline is intended to serve as a step toward an inductive 
method in developing some of the elementary principles in econom- 
ics. This preliminary formulation lacks consistency and proportion, 
not to mention other deficiencies. It is published now because its 
usefulness when in mimeographed sheets seemed to justify this more 
convenient form. It is hoped that before final formulation some of 
its deficiencies w^ill be eliminated through further experimentation 
and revision. 

Acknowledgment is made to Professor F. M. Taylor for many 
questions, and to Professor T. N. Carver for suggestions on conser- 
vation of human energy and on ideals of distributive justice. 



CONTENTS 
A. Introductory 

I. Preliminary 
II. General Survey 

1 . The Evolution of Industrial Society 

2. Analysis of the Present Industrial System 

B Economic Wants, Motives, and Choices 
I. Analysis and Definition 

II. Means of Satisfying Wants 

C. The Productive Process 

I. The Meaning of Production 

II. Natural Agents and the Productive Process 

1. Meaning of Natural Agents 

2. Land and the Productive Process 

a) The Function of Land in the Productive Process 
h) The Future of Production as Determined by Land 
i. Physical Limitation of Land 

ii. Exhaustion of Powers 

iii. The Law of Return 

III. Labor and the Productive Process 

1. Definition 

2. The Elements of the Labor Power of a Community 
a) The Number of Laborers 

h) The Efficiency of Each Individual 
i. Health and Strength 
ii. Mental Qualities 
iii. Moral Qualities 
iv. Social Conditions 

c) Time of Labor 

d) Division of Labor (treated under Organization) 



viii OUTLINES OF ECONOMICS 

3. The Need of Conservation of Human Energy 

a) Destructive Occupation 

b) Dependency 

c) Idleness 

i. The Unemployed 
ii. The Voluntarily Idle 

d) Inadequate Occupation 

e) Inadequate Care of Public Health and Public Sanitation 

f) Debauchery 

4. The Increase of Population 
a) Natural Increase 

h) Immigration 

IV. Capital and the Productive Process 

1 . The Definition and Function of Capital 

2. The Increase of Capital 

V. Organization and the Productive Process 

I. The Regime of Exchange Co-operation 
2.' Specialization 

a) The Separation of Occupations 

h) The Division of Labor 

c) Territorial or Geographical Specialization 

i. Grouping of Related Industries 
ii. Grouping of Many Plants of the Same Industry 

d) How Far Specialization Can Be Carried Depends 
upon: 

i. The Nature of the Industry 
ii. The Extent of the Market 
iii. Social Institutions 
iv. Financial Organization 

3. The Apportioning of the Productive Factors 

4. Present Forms of Industrial Organization 

a) Private Property and the Competitive Regime 

b) Entrepreneurship and Capitalistic Industry 

i. The Individual Firm 
ii. The Partnership 



CONTENTS ix 

iii. The Corporation 

iv. Co-operative Enterprise (treated under Social 
Reform) 
c) The Size of the Most Efficient Unit 
5. Modern Organization Exemplified by Certain Industries 

a) Agriculture 

b) Transportation (Railroads) 

i. The Development of the Railroad Net 
ii. Leading Characteristics of the Railroad Industry 
iii. Results of These Characteristics 
iv. Government Regulation in the United States 

c) Manufactures (Trusts) 

i. The Origin of the Trust Problem 
ii. The Trust Movement in the United States 
iii. The Promotion and Organization of a Trust 
iv. Causes for the Growth of Trusts and the Results 

of the Trust System of Organization 
V. The Lines of Procedure in DeaUng with the Trust 
Problem 

D. Exchange 

I. Markets 
II. Value 

1. The Nature of Value and Price 

2. Demand and Supply in Relation to Value 

3. The Marginal Utility Explanation of Value 

4. Analysis of Demand 

a) Determinants of Demand 

i. Desire 

ii. Effectiveness of Desire — Purchasing Ability 
iii. Number of Persons Affected 

b) Some of the Forms or Manifestations of Demand 

i. Elastic and Inelastic Demand 
ii. Derived Demand 
iii. Composite Demand 
iv. Joint Demand 

5. Analysis of Supply 

a) Meaning of Supply 

b) Temporary versus Long-run Conditions of Supply 



OUTLINES OF ECONOMICS 

c) Determinants of Supply 

i. Physical Determinants 

(i) Relatively Fixed Stock 

(2) Character of the Commodity 
ii. Social Determinants 

(i) Formal Social Control 

(2) Informal Social Control 
iii. Monopolistic Limitation 
iv. Cost of Production 

(i) Constant Cost 

(2) Increasing Cost 

(3) Diminishing Cost 

d) Some of the Forms or Manifestations of Supply 

i. Joint Supply and By-Products 
ii. Composite Supply and the Principle of Substitution 
6. General Questions on Value 

III. The Mechanism of Exchange 

I. Money Exchange 

a) The Nature and Functions of Money 

b) The Characteristics of a Satisfactory Money Good 

c) The Forms of Money 

i. Standard Money 
ii. Token and Subsidiary Currency 
iii. Credit Money 

d) The Value of Money 

i. The Value of Standard Money 
ii. The Value of Other Forms of Money 

e) Gresham's Law 

/) The Kinds of Standards 
i. The Single Standard 

ii. The Double Standard 

iii. The Limping Standard 

iv. The Tabular Standard 

V. The Paper Standard 
g) International Flow of Money (treated under Foreign 

Exchange) 



CONTENTS XI 

2. Credit Exchange 

a) Credit and Credit Instruments 

b) Credit Institutions (with particular reference to banks) 

i. Principles of Banking 
ii. Clearing-House Operations 
iii. Comparison of Banking Systems 
iv. Foreign Exchange (treated under International 
Trade) 

IV. International Trade 

1 . The Principles Determining International Trade 

a) Trade Based upon Insuperable Differences 

b) Trade Based upon Differences Constituting Reciprocal 
Superiority 

c) Trade Based upon Differences Constituting Relative 
Superiority 

2. The Balance-of -Trade Idea 

3. Foreign Exchange 

4. Regulation of International Trade (with particular reference 
to the protective tariff) 

E. The Distributive Process 
I. Introductory 
II. Rent 

1. Introductory 

2. The Diferential Return 

3. The Relation of Economic Rent to Contract Rent 

4. Rent and Cost of Production 

5. Rent in Relation to Taxation 

6. Rent and Social Reform 

7. Economic Phenomena Analogous to Rent 

III. Wages and Trade Unionism 

1. The Demand for Labor 

2. The Supply of Labor 

3. Some Practical Applications of the Principle of Demand 
and Supply 

4. The Specific Productivity Theory of Wages 



xii OUTLINES OF ECONOMICS 

5. Trade Unionism 

a) Causes of Trade Unionism 

b) Trade Union Organization and Demands 

c) Trade Union Theory 

d) Trade Union Policies and Methods 

e) The Social Problem of Unionism 

IV. Interest 

1. Introductory 

2. The Demand for Capital 

3. The Supply of Capital 

4. General Questions on Interest 

V. Profits 

1. Introductory 

2. The Risks of Industry 

a) The Nature of Industrial Risks 
h) Speculation in Relation to Risks 
c) Insurance in Relation to Risks 

3. General Questions on Profits 

F. Public Finance and Taxati -n 

I. The Forms of Public Expenditure 
II. The Sources of Public Revenue 

1. Public Loans 

2. Public Domain 

3. Public Industries and Investments 

4. Fees and Assessments 

5. Taxation 

a) Canons of Taxation 

i. The Principle of Benefit 
ii. The Principle of Abihty or Faculty 

b) Forms and Incidence of Taxation 

i. The General Property Tax 
ii. Customs Duties 
iii. Excise Taxes 
iv. Income Taxes 



CONTENTS xiu 

V. Inheritance Taxes 
vi. Corporation and Business Taxes 
c) Tax Reform 

Social Reform 
I. Criticisms of the Present Industrial Order 

1 . Economic Defects 

a) The Defects of the Productive Process 

i. The Wastefulness and Duplication of Effort 
ii. The Artificial Stimulation of Wants 

iii. The Carelessness in Conserving Human Energy 

iv. The Adulteration of the Product 

b) The Defects of the Distributive Process 

i. The Great Inequalities in Possessions and Incomes 
ii. The Unfortunate Situation of the So-called Lower 

Classes 
iii. The Results in Checking Social Development and 
Possibly Even in Checking Production 

2. Resulting Social and Political Defects 

a) Corruption and Favoritism in Government 

b) Militarism 

c) Vice and Crime 

3. Difficulty (impossibihty ?) of Remedying These Evils under 
the Present System 

II. Remedies Which Have Been Suggested 

1 . Individual Reform 

a) The Agencies of Individual Reform 

b) The Significance of Individual Reform 

2. Social Reform 

a) Reforms Involving No Vital Change in the Present 
Order 
i. Reforms Implying an Initiative from the Class 

Hoping to Be Benefited 
ii. Reforms Implying an Initiative from Other Classes 
iii. Reforms Implying a Measure of Governmental 
Regulation 



XIV OUTLINES OF ECONOMICS 

b) Reforms Practically Amounting to Revolution 

i. Land Nationalization. Dealt with under Rent 
ii. Anarchism 
iii. Communism 
iv. Socialism 

(i) The Sociahst Philosophy 
(2) The Sociahst Movement 

III. Suggested Ideals or Distributive Justice 

1. The Aristocratic Ideal 

2. The Communistic Ideal 

a) To Each According to His Wants (desires ? or needs ?) 

b) To Each an Equal Share 

3. The Socialistic Ideal 

a) To Each According to His Labor 

b) To Each According to His Services to Society (pre- 
sumably to be determined by a government bureau) 

4. The Competitive Ideal 

a) To Each According to his Services to Society 

i. Measured in Terms of Utility and not of Effort 
ii. Evaluated Not by Pubhc Officials but by Judgment 
of Those Receiving the Service 

b) The Propositions Underlying This Ideal 

i. Each Individual of Mature Age and Sound Mind 
Knows His Own Interest Better than a Body of 
Officials Can 

ii. Each Individual, if Left to Himself, Will Pursue His 
Own Interest 

iii. All Harmful or Non-serviceable Methods of Pur- 
suing This Interest Should Be Closed 

iv. The Individual's Weil-Being Will Then Depend 
upon the Amount of His Service to Others, Whence 
a Great Stimulus to Service 

V. No Hampering of Altruistic Motives. There Is, 
However, a UtiUzation of Selfish Motives 



A. INTRODUCTORY 

I. Preliminary 
II. General Survey 



I. Preliminary 

Economics is one of the social sciences. Tliese social sciences 
treat of men living together in society. They seek to analyze the 
existing situation, to explain the forces now operating. Since society 
is always in a state of change and evolution these social sciences 
study a process rather than merely a static situation. None of these 
social sciences can be sharply differentiated from another. They 
overlap. They are merely different points of view in studying one 
and the same thing, society. 

Economics has as its task, or as its viewpoint, the analysis of the 
activities of men in the process of getting a Kving — in the process of 
attempting to satisfy their wants. This means that we shall study 
(i) the nature of wants and the application of goods to their satis- 
faction (generally called consumption); (2) the bringing into existence 
of the means of satisfying wants (generally called production); (3) 
the valuation set upon goods in the process of exchanging them 
(generally called exchange); and (4) the apportionment or sharing 
of these goods among the members of society (generally called dis- 
tribution). Of course some wants are satisfied without effort on our 
part, e.g., our want for air. As such cases present no problem, the 
economist does not concern himself wdth them. In most cases, how- 
ever, nature does not spontaneously satisfy our wants, and this one 
commonplace fact goes far to explain human activity along all social 
lines. 

Questions 

1. Wherein do you think the viewpoint of economics differs from 
that of poUtical science ? of ethics ? of aesthetics ? 

2. Name some of the laws passed by our legislatures that have 
economic consequences. 

3. If man's environment spontaneously supplied means of satis- 
fying all his wants without effort on his part, would there be such a 
thing as theft? 

4. Can you name other social phenomena and problems which 
arise largely from the fact that nature does not spontaneously satisfy 
our wants? 



2 OUTLINES OF ECONOMICS 

5. What do you consider the ten most important questions of the 
day ? How many of these involve economic matters ? 

6. Would far-reaching economic changes, such as the change from 
good times to hard times, be likely to have pohtical consequences? 
Would such changes be likely to affect the average man's attitude 
toward Ufe? 

7. Do you beheve that you can form a satisfactory judgment upon 
a given historical period, e.g., the colonial period in America, without 
having a knowledge of the economic conditions of the time? 

8. "In the effort better to satisfy our wants several things might 
be done: (a) diminish the number of our wants; {b) change the 
character of our wants, e.g., develop altruism; (c) provide for larger 
production and better distribution of wealth." Are any of these 
being done today ? What part of the problem falls to the economist ? 

9. Try to estimate how large a portion of our life is given over to 
the attempt to satisfy economic wants. 



II, General Survey 

1 . The Evolution of Industrial Society 

2. Analysis of the Present Industrial System 

A view of a machine as a whole aids in understanding the functions 
of the parts. A brief general survey of the modern industrial system, 
showing how it originated, how it developed, and its form at the 
present time should be of assistance in the later detailed study of its 
operations. 

I. The Evolution of Industrial Society 

There is continuous change going on in industrial society. The 
economic organization which prevails in the United States at the 
present time is in many essentials very different from that which 
prevailed in the early colonial days or at the outbreak of the Revolu- 
tion, or even fifty years ago. Fifty years from now it may be very 
different from what it is today. These changes are the result of 
many and complex forces such as natural forces and conditions, human 
motives, social institutions, etc. In it all the economic point of 
view is prominent — the effort to devise better methods of enabling 
us to satisfy our economic wants. 

As industry has developed from the earlier forms to the present 
form there has been a continuous tendency toward specialization. 
Occupations have become differentiated, division of labor has in- 
creased, productive processes have become more efficient as well as 



INTRODUCTORY 3 

more complex, and the time which elapses between the beginning of 
the production of a good and the consumption of that good has been 
greatly lengthened. Without attempting to press too far into the 
origins of society we may distinguish four main stages of develop- 
ment, from the point of view of industrial society: (i) The independent 
or domestic economy; (2) the town or local economy; (3) the national 
economy; (4) the international or world economy. 

The first stage is illustrated by the Indian, the patriarchal family^ 
the primitive tribe, or the western pioneer. The wants in each of 
these cases were supplied by the products of their own efforts without 
any very round-about process. The next stage appears where an 
exchange of products becomes customary. Division of labor takes 
place. The process of production is lengthened in time and it becomes 
more efficient, thus making it possible for a given area to support a 
larger population. Then as means of transportation improve, one 
section of the country begins to specialize in one thing and another 
section in something else ; they are no longer independent self-sufficing 
units; the process of production becomes more comphcated; and we 
have the growth of a national economy. Sometimes this process of 
specialization may be carried so far that a whole nation comes to 
speciaHze in manufacturing, and becomes very largely dependent 
upon other countries for its raw material and food supplies, as in 
the case of Great Britain today. Such a situation may well be called 
an international economy. The present tendency toward this stage 
is manifested in the increasing dependence of modern nations upon 
foreign supplies and foreign markets. 

These stages of economic development have appeared in different 
countries at different times; in some places one stage continued 
dominant for many centuries, as in parts of Europe; in others a stage 
may have lasted but a few decades, as in the United States. There 
are many intermediate stages, and one seldom finds a situation where 
the household, the locality, or the nation is absolutely self-sufficing. 



Questions 

I. Suppose that in the pioneer stage in Illinois all the people 
except one family had left the country. Could that family have 
satisfied its wants as well as before? How would such an event 
affect the satisfaction of your wants today? 

2. How did the Illinois pioneer of 1820 get the clothing worn 
by his family? Why does not the Illinois farmer of today use the 
same method? 

3. There were formerly many more "jacks of all trades" than 
there are now. Why? 



4 OUTLINES OF ECONOMICS 

4. Are any industries today in the handicraft stage ? 

5. Mention some concrete cases where (i) the development of 
transportation and communication, (2) natural forces, (3) social 
institutions, (4) racial characteristics, have influenced the evolution 
of industrial society. 

6. In the evolution of industrial society trace some of the mani- 
festations of (i) specialization and division of labor; (2) social inter- 
dependence; (3) complexity of form; (4) increased productive 
efficiency. 

2. Analysis of the Present Industrial System (briefly and 
provisionally treated) 

Nothing but the briefest preHminary survey can be attempted at 
this point. The modern system is the result of a development. It 
may be Hkened to a great machine, infinitely vast, endlessly complex, 
and remarkably efficient in spite of its numerous defects. The 
industrial society of today is an exchange society which has as 
characteristic features private property, individual initiative, com- 
petition, specialization, large-scale production, and a capitalistic 
character of production. The processes of this society are not 
separate and distinct, but interacting. For example, while goods are 
being produced the distributive process is taking place at the same 
time. There is not and cannot be any sharp line between the pro- 
ductive process, exchange, and the distributive process. 



Questions 

1 . Trace in detail and from the very first the processes which have 
to be gone through to supply your want for a cup of coffee. How 
many people do you suppose helped in that process? Point out 
"production features," "exchange features, " and " distributive fea- 
tures" in the process. Do you think it desirable to be dependent on 
so many people in the satisfying of your wants ? 

2. Why go to work to make a machine to make a machine to 
make a machine to produce a pair of shofis ? Would it not be better 
to avoid all that roundabout process and have a cobbler make them 
in the first place ? 

3. Do the following aid in the satisfying of wants: the railroad, 
the post-office, the miner, the poHceman, the law court, the newsboy, 
the weather reporter, the agricultural experiment station, money, a 
stock certificate, a corporation, a bank, a patent, a wholesale grocery, 
a valet, a ragpicker ? 

4. Classify the above (in question 3) according to whether they 



INTRODUCTORY 5 

contribute to (i) the productive process, (2) the exchange process, 
(3) the organization process. 

5. Suppose all the railroads in the country were removed, how 
would that affect the efficiency of the industrial machine ? 

6. Should you agree that the entrepreneur (i) directs industry, 
(2) directs distribution ? 

7. The payment of wages in money is possible only in an exchange 
economy. Discuss the situation of a coal miner under a system in 
which his wages could consist of only the goods he produced. Could 
coal be used as fuel to any general extent under such conditions ? 

8. ''Exchange does not really help. Indeed it hinders. Time 
and energy are spent in merely passing goods on." Do you agree ? 

Q. Suppose you were to form a corporation to manufacture 
candy. Make a generalized hst of the things you would do the first 
year. 

10. Classify the above things according to whether they are 
parts of (i) the productive process, (2) the exchange process, (3) the 
organization process, (4) the distributive process. 

11. Has the institution of private property always existed? If not, 
when did it arise, and why ? 

12. How does it happen that we do not have the state look after 
the supplying of our w^ants instead of relying on individual initiative ? 
Do you know of any case where the state does carry this burden ? 

13. Was there formerly the gulf between the laboring class and 
the employing class that exists today? 

14. Formerly a cobbler owned his own shop and tools, managed 
the shop, employed apprentices, and did some of his work himself. 
How does the modern large shoe factory differ from that ? Does it 
illustrate speciahzation ? 

15. Do you think the modern organization of industry requires 
greater managerial skill and ability than formerly, and if so why ? 

16. Do the captains of industry of today usually own the concerns 
they manage ? What was the situation in earlier times ? 



B. ECONOMIC WANTS, MOTIVES, AND CHOICES 

I. Analysis and Definition 
XL Means of Satisfying Wants 



I. Analysis and Definition 

Since political economy is concerned with the effort to satisfy 
wants, some idea must be gained of the characteristics of wants, 
motives, and choices. This section of the work is, of course, largely 
a discussion of social psychology. Our main concern is with the 
consequences of this psychology in so far as these consequences are 
economic. 

Questions 

1. Try to draw up a classified hst of our wants. Are they confined 
to things which enter into commerce ? Are they confined to material 
things ? 

2. In the case of most of our wants it is said that a "law of 
diminishing utility" or ''law of satiety" applies. 

a) State this law, giving particular attention to a formulation 
of the conditions under which it is true. 

b) What practical results of the working of this law appear in 
the industrial world ? 

3. It is said that "the sum total of human wants cannot be 
sated." 

a) What evidence can you advance concerning the validity of 
this statement ? 

b) What practical results of the working of this law appear in 
the industrial world ? 

4. It is said that "wants are determined largely by social 
standards." 

a) What evidence can you advance concerning the validity of 
this statement? 

b) What practical results of the working of this law appear in 
the industrial world ? 

5. Are our wants wholly under the control of our reason? Do 
we always desire those things which are beneficial ? Worthy ? Can 

6 



ECONOMIC WANTS, MOTIVES, AND CHOICES 7 

you gi\'e cases where wants seem to flow from the action of habit ? 
Custom ? Social inheritance ? Instinct ? 

6. Would it be safe to assume that men always pass an intelligent 
judgment upon the advantages and disadvantages of any course of 
action ? Is it safe to assume that men are guided solely by intelligent 
self-interest ? To what extent are they so guided ? Can you cite 
instances where the situation you believe to exist in this matter affects 
men in their economic relations ? 

7. Are you able to satisfy all your wants? Does law or social 
custom prevent you in some cases? Would you have sufficient 
purchasing power to do so in any case ? 

8. Since you must make choices, you probably seek first to gratify 
your most pressing desire, x. Can you tell why x is the most pressing 
of your desires ? 

9. Do people actually apportion their expenditures for the articles 
they buy in accordance with their abstract opinions of what would be 
judicious expenditure ? 

10. Suppose you had $100 to spend. Would you spend all of 
it at once ? What w^ould you buy ? Would you buy the same things 
at all times and under all circumstances ? 

11. If you had $200 to spend, would you include among your 
purchases all the things you would have bought for $100? 

12. A has an annual income of $600 and expends 20 per cent for 
i", 35 per cent for x, 30 per cent for y, 15 per cent for s. B has an 
annual income of vS6o,ooo. Will his expenditures be in the same pro- 
portion ? Why ? Give concrete illustrations ? 

13. Make a list of reasons why men engage in production. Is 
altruism sometimes a cause ? 

14. Is love of power a motive that leads men to produce wealth ? 
Should the economist deal with this ? 

15. Do many men, because of patriotism, remain in one country 
when they would fare better in another ? Should the economist deal 
with this ? 

16. Should the economist deal with "economic wants, motives, 
and choices," or with all wants, motives, and choices which have 
economic significance ? Is economics the only science which is con- 
cerned with human wants ? 



II. Means of Satisfying Wants 

Means, whether material or non-material, of satisfying wants are 
called goods. These goods, when utilized by man, yield utility or 
the capacity to satisfy wants. The following diagram is a descriptive 
classification of goods. 



OUTLINES OF ECONOMICS 

Material (wealth) 



Economic Goods 

(have utility, are scarce j 
and appropriable) ( Non-Material (services) 



Means of Satisfj'ing 

Wants— Goods ) i Material 



/ iviuLeiitii \ 

(have utility) i I 

\ Non-Material / 



The economist does 
Free Goods / / not concern him- 

self with these 



Questions 

1 . Does every good possess utility ? Is everything which possesses 
utility a good? 

2. Have the following utility: whiskey, a gambler's pack of cards, 
clothes of an obsolete fashion, opium, grand opera, air ? 

3. Make a list of things which are clearly wealth. 

4. Make a list of things which are clearly not wealth. 

5. Make a Hst of things concerning which you are in doubt as 
to whether they are wealth. 

6. Define wealth. 

7. Are the following wealth: an ocean steamship; a pleasure 
yacht; a ship on the bottom of the ocean; gold in the mine; gold, to a 
shipwrecked sailor on a desert island; a wooden leg; health; eye- 
sight; a waterfall; a head full of useful knowledge; water? 

8. "A thing may be wealth and not be useful, e.g., an old 
stone prized by a collector." Comment. — T. 

9. "To be wealth a thing must be scarce." Is that equivalent 
to saying that the less we have of things the better off we are ? Is 
wealth the ultimate measure of well-being? Does "scarce" mean 
"rare"? 

10. If wealth increases will there be greater well-being? What 
is the relation of wealth to well-being ? 

11. Is an encyclopedia wealth? Among Indians? 

12. Give examples of wealth which never becomes a direct source 
of gratification, but the possession of which is greatly prized. Why 
so prized? 

13. From the point of view of the economist could you accept 
as a definition of wealth — 

a) Means of satisfying wants. 

h) Things which make for welfare. 

c) Material things having value. 



ECONOMIC WANTS, MOTIVES, AND CHOICES 9 

d) Material means of satisfying wants. 

e) Material things upon which labor has been expended. 

14. Do we measure wealth in terms of physical units, or in terms 
of value ? 

15. Suppose A-power were produced at one-fourth the cost of 
steam-power. Effect upon the wealth of the country ? Upon certain 
parts of that wealth ? 

16. "There are many evidences that men are mostly fools, but 
none better than the fact that a diamond no larger than a small pea 
and of no use save to satisfy the silliest of wants will sell for perhaps 
$5,000, while a bushel of wheat, capable of sustaining a human life 
for several weeks, sells for 80 cents." Comment. — T. 

17. Could a thing that was wealth at one time cease to be wealth 
at some other time ? Could the reverse be true ? Why ? 

18. If a coat should go out of style would it still be wealth ? 

19. Make a list of non-material economic goods-. 

20. Make a list of non-material free goods. 

2 1 . Should the economist be as much concerned with non-material 
as with material economic goods ? Can we say that one is more 
important than the other ? 

22. W^hat distinguishes wealth from services? 

23. Should we consider services which have a tangible result more 
important than those which do not? Give several illustrations of 
each kind. 

24. When a U.S. gold certificate is destroyed is wealth destroyed ? 

25. Is a railroad bond wealth ? A patented invention ? Afire- 
insurance policy ? 

26. Are the following wealth: A court-house; a warship; a city 
hall ; a public library ? Are they private property ? 

27. How do you distinguish between social wealth and private 
wealth ? Does social wealth include more than private w^ealth ? 



C. THE PRODUCTIVE PROCESS 

I. The Meaning of Production 

II. Natural Agents and the Productive Process 

III. Labor and the Productive Process 

IV. Capital and the Productive Process 

V. Organization and the Productive Process 



I. The Meaning of Production 

Production is the bringing into existence of economic goods. As 
has been seen these goods may be material or non-material, and it is 
not possible to say that one form is more important than the other. 
Of course, the productive process does not exist as a thing in itself, 
separate from the exchange and distributive processes. A more 
accurate statement would be that we are now about to study indus- 
trial society from the point of view of the productive process. In 
dealing with complex and interacting phenomena it is necessary to 
resort to such abstractions chiefly as a method of exposition. 



Questions 

1 . Give examples of the creation of form-utilities ; of place-utilities ; 
of time-utiUties; of possession-utilities. 

2. Is a railroad an instrument of production, or of the "distribution 
of wealth"? 

3. Are the following enterprises productive: cold storage; the 
express business; the mail service; the telephone service; a retail 
candy business; speculative buying of grain to be held for a rise in 
price ? 

4. "Exchangers, merchants' middlemen, are non-producers, mere 
parasites on industry." Comment. — T. 

5. "Exchange gives no gain except to one of the parties and then 
only on condition that the other loses something." Comment. — T. 

6. "Only agriculture and mining are truly productive; for they 
alone add to the sum total of wealth." Comment. — T. 

7. Do social conditions influence production ? If so, give concrete 
examples. 



THE PRODUCTIVE PROCESS ii 

8. Can you establish which is the more important factor in pro- 
duction: human abiUty or the responsiveness of our surroundings ? 

9. Can one estabHsh that nature aids more in one industry than 
in another ? 

10. Production has been classified descriptively as follows: 

A. Material production 

a) Mere occupancy 

b) Extractive industries 

c) Manufacturing 

d) Transportation 

B. Non-Material Production 

a) Ideas with economic consequences 

b) Work of credit institutions 

c) Services, e.g., work of domestics, teachers, etc. 
Draw up a classification of your ow^n. 

In sees. II, III, IV, and V (under C) we shall be concerned with 
an analysis of the various parts or agents of the productive process. 
Much of the matter to be presented is descriptive rather than strictly 
logical, and much of it has to do with the technique of industry. In 
deahng with these agents of the productive process we may take 
either the social or the pecuniary point of view. The social point of 
vdew surveys those characteristics which apply to society as a whole 
and which would be apt to be true under any organization of society. 
The pecuniary point of view surveys the characteristics due to the 
institution of private property^ It is concerned with what is for the 
interests of the individual. This may or may not be for the interest of 
society as a w^hole. Both points of view must be included in a com- 
prehensive survey of the situation as it exists today. We must learn 
to distinguish what is "social," what is "pecuniary," and w^hat is 
" both social and pecuniary." The two points of view^ are not neces- 
sarily antagonistic. 

II. Natural Agents and the Productive Process 

1. Meaning of Natural Agents 

2. Land and the Productive Process 

a) The function of land in the productive process 

b) The future of production as determined by land 

i. Physical limitation of land 

ii. Exhaustion of powers 

iii. The law of return. This law is discussed here as apply- 
ing only to land. A wider application of the principle 
will be made later under the topic of organization. 



12 OUTLINES OF ECONOMICS 



Questions 



1. Cite concrete cases where the following natural agents are of 
importance in the productive process: adhesion, cohesion, gravitation, 
geographical situation, geological conformation, sunlight, cHmate, 
fertile soil. Mention other natural agents and show their connection 
with the productive process. 

2. Do the natural resources influence the development of industries 
in a country ? How have they affected the industries of the United 
States ? 

3. What are the chief natural resources of the United States? In 
respect of what resources is the United States pre-eminent ? 

4. What natural agents mentioned in Question i may be termed 
free goods ? Do we need to discuss these in detail ? Why ? 

5. In his practical discussion of "natural agents" the economist 
narrows the term to mean what is generally known as land. Justify 
this. 

6. Of what use is land to the lumberman ? to the manufacturer ? 
to the shop-keeper ? to the traveling salesman ? to the fisherman ? to 
the aviator ? 

7. Is land necessary to all production ? How about the services of 
the domestic servant? 

8. Generalizing your answers to the two preceding questions, what 
do you think are the fundamental uses of land in production ? 

9. Is there any limit to the amount of land ? 

10. What is made land ? Can land be made by draining; irrigat- 
ing; fertilizing; addition of sand or clay ? 

11. Are there "original and indestructible powers of the soil"? 
If so, what are they ? 

12. Why does any farmer cultivate more than one acre? 

13. Why are different qualities of land under cultivation? 

14. From your reading, work out a statement of the conditions 
under which the law of diminishing returns applies. 

15. Does this law apply to land only in the case of its use for 
agricultural purposes ? 

16. Does the law of diminishing returns apply to a coal mine? 
to building land in the center of a city ? 

17. Work out a demonstration of the fact that the productivity 
at the extensive margin equals that at the intensive margin. 

18. "Agriculture in Michigan is in the stage of diminishing 
returns, for the land is worn out." Does this prove the assertion 
made ? — T. 



THE PRODUCTIVE PROCESS 13 

III Labor and the Productive Process 

1. Definition 

2. The Elements of the Labor Poiver of a Community 

3. The Need of Conservation of Human Energy 

4. The Increase of Population 

Note. — In the detailed analysis of these items below consider what factors 
would be likely to hold true in any organization of society. 

1. The Definition of Labor 

Questions 

1. Should the effort of a dray-horse be called labor ? 

2. Should you call the hod-carrier a laborer if he worked for 
pleasure? Should you call the college football player a laborer if 
he were given his board? 

3. Draw up a series of instances which are clearly labor. 

4. Draw up a series of instances which are clearly not labor. 

5. Draw up a series of instances concerning which you are doubt- 
ful as to the classification. 

6. Is the effort of the following to be called labor: a banker, a 
college football player, a professional baseball player, a promoter, 
an opera singer, a hod-carrier, a preacher, a voluntary settlement- 
worker ? 

7. In the light of the preceding questions how should you define 
labor ? 

2. The Elements of the Labor Power of a Community 

a) The number of laborers (See the topic "Increase of Popula- 
tion" below.) 

b) The efficiency of each individual 

i. Health and strength 
ii. Mental quahties 
iii. Moral qualities 
iv. Social conditions 

c) Time of labor 

d) Division of labor (treated under ''Organization") 

Questions 

I. Cite instances where each of the factors mentioned in the above 
analysis w^ould have a bearing. 



14 OUTLINES OF ECONOMICS 

2. Take up each of these elements of labor power and discuss the 
changes that may be expected in it in the future. 

3. The Need of Conservation of Human Energy 

examples of the waste of human energy 
a) Destructive Occupation 

i. Criminal classes; persons consciously or unconsciously 

engaged in work contrary to public interests, 
ii. Child-laborers; women working under unsuitable conditions; 
persons in unhealthful or hazardous occupations. 
/;) Dependency 

The unemployable — defectives; degenerates; invalids; per- 
sons temporarily ill or disabled. 

c) Idleness 

i. The unemployed 
ii. The voluntarily idle 

d) Inadequate Occupation 

The imperfectly employed — uneducated persons; persons in 
occupations unsuited to their capacities, as result of ignorance, 
thoughtlessness, conventions, or lack of opportunity; dilettanti. 

e) Inadequate Care of Public Health and Public Sanitation 

f) Debauchery 

Questions 

1. Analyze the causes for the different forms of waste, and point 
out in each case promising means of reform. 

2. Which do you consider more important: conservation of human 
energy or conservation of natural resources? 

3. Is a waste of labor power involved in (a) the care of the sick; 
(b) the care of persons too young to work; (r) the care of persons 
too old to work; {d) compulsory school attendance; (e) premature 
death; (/") militarism? 

4. What judgment, considering the matter from an economic point 
of view alone, is to be passed on an idle rich man ? 

5. Is it possible to tell by a man's earnings whether he is (a) 
destructively employed ; (b) imperfectly employed ? 

4. The Increase of Population 

a) Natural Increase 

b) Immigration 

The theory of population has commonly been discussed as if it 
were essentially the explanation of the number of laborers, because 



THE PRODUCTIVE PROCESS • 15 

the supply of labor has some relation to the total population. In 
deference to that usage it is introduced at this point; though properly 
the problem of population is much broader and involves man as a 
consumer as well as a producer 

Populations are increased (a) by excess of births over deaths, or 
natural increase, and (b) by excess of immigration over emigration. 

a) Xatural Increase of Population 

Questions 

1 . State in your own words the Malthusian theory of population. 

2. When was Malthus' Essay on the Principle of Population 
published ? Was the increase of population greater cause for con- 
cern then than now ? Why ? 

3. What are positive checks? Preventive checks? Has the 
working of these checks changed since Malthus wrote ? 

4. Does the phenomenon of " race suicide " disprove the Malthusian 
theory ? 

5. ''During the last century population has increased at a rapid 
rate and yet the per capita food supply has increased. Evidently 
there is something wrong with the Malthusian doctrine or with the 
law of diminishing returns." Do you agree ? 

b) Immigration 

Migration, as a phenomenon of population, includes internal 
migration (as in the case of persons leaving the country for the city), 
and also the migration over sea, or across national boundaries, which 
we call emigration and immigration. Immigration, notably conspicu- 
ous in the United States, calls for special comment at this point 
because of its bearing upon American labor conditions. 

Questions 

1. Name the more important motives by which persons are {a) 
caused to leave the country of their birth; {b) attracted to other 
countries. 

2. Give examples from the experience of this country of types of 
immigrants whose coming has been due to the several causes indicated 
in your answer to the preceding question. 

3. Explain the great fluctuations of the movement of immigrants 
to the United States since 1820. 

4. What great change in the prevailing character of our immigrants 
has occurred within the last generation ? 

5. It is argued that cheap immigrant labor is like machinery — 



i6 OUTLINES OF ECONOMICS 

an added aid in production which reUeves the (native) laboring 
class from heavy and disagreeable toil. Is the analogy true ? 

6. Is the manufacturers' argument for cheap immigrants valid 
from the point of view of society in general ? 

7. Should immigration be prohibited ? restricted? If restrictions 
are imposed, should they hmit the number of immigrants, or fix 
a test of the quality of immigrants, or do both ? 

8. Why is the immigration of the Chinese subject to special 
restrictions ? 

9. Would restriction of immigration be justified if the congestion 
of immigrants in cities and along the seaboard could be prevented, 
and the foreign elements distributed over the whole country ? 

10. Walker contended that our population is no larger today than 
it would have been if there had been no immigration. Can this be 
true ? Tell why you answer as you do. 



IV. Capital and the Productive Process 

1. The Definition and Function of Capital 

2. The Increase of Capital 

I. The Definition and Function of Capital 

From the social point of view capital may be defined as the material 
instruments which man uses in production. The question of who 
owns these instruments or whether anyone owns them matters Uttle. 
They may be owned by private individuals or by the state — they are 
still aids in production. From the pecuniary point of view capital 
is material goods which yield an income. This will include producers' 
goods, but also some consumers' goods (Cf. Carver, Distribution of 
Wealth, chap. iii). As we are now concerned with the productive 
process we shall, for the present, consider mainly the social point of 
view. 

Questions 

1. Make a Hst of things which are clearly capital. 

2. Make a list of things which are clearly not capital. 

3. Make a list of things concerning whose classification you are 
in doubt. 

4. Are the following capital: pig iron; a plow; candy on the 
shelves of a retail dealer; a package of tobacco belonging to a laborer; 
a carriage ; coal ? 

5. Capital has been variously defined, with reference to production, 
as follows: Wealth (excluding land) devoted to the further produc- 



THE PRODUCTIVE PROCESS 17 

tion of wealth; past products devoted to further production ; inchoate 
wealth; intermediate products; producers' goods; future goods; 
wealth (excluding land) devoted to further production. Can you 
reconcile these definitions? 

6. Does capital really produce ? How ? 

7. Name some employment, if you can, in which labor produces 
without capital. 

8. The process of producing with the aid of capital has been 
called indirect or roundabout production. Why? 

9. It has been said that the intention of the owner determines 
whether a thing is capital or not. Could a cotton mill be a con- 
sumers' good ? Suppose the owner exchanged it for a country house; 
would the mill then be capital? 

10. Mr. X is so skilful in forging steel instruments that he can 
earn $12 per day at it. Is his skill capital ? — T. 

11. " Patti used her voice to earn her living just as a carpenter uses 
his tools to earn a living. Her voice was therefore her capital." 
Comment. — T. 

1 2 . Is money capital ? 

13. Are securities capital? 

14. Capital is subdivided into fixed and circulating capital; 
si)ecialized and free capital. Give examples of each sort of capital. 

15. Wherein does the conception of capital above presented differ 
from that of the business man ? 

16. Summarize the points of difference between capital and land. 

2. The Increase or Capital 

This depends upon: 

a) The size of the savable fund. 

h) The effective desire of accumulation. 

Questions 

1. Is the effective desire of accumulation stronger in the United 
States or in Central America? Why? 

2. "The secret of Holland's great commercial prosperity at the 
present time (1680) is the low rate of interest prevailing in that country. 
Her merchants can get all the capital they want at 3 per cent, while 
ours pay 6 and 7. If Parliament would by law prohibit any rate 
above 3 per cent, wt should soon overtake, or even outstrip our rivals." 
Comment. — T. 

3. What economic results would ensue if the charging of interest 
were prohibited by law? 



i8 OUTLINES OF ECONOMICS 

4. What is it that prevents capital from increasing indefinitely? 
Provided the disposition to save remains the same, would as much be 
saved if the return to capital and labor constantly diminished? 

5. Does the necessity of saving exist because of the present organi- 
zation of society? Would there be "saving" in a sociaUstic society? 
If so, who would do the saving; 

6. A man increases his capital by saving, which involves diminu- 
tion of his consumption, but his capital can be used only by being 
consumed. Explain. 

7. Capital is the result of saving; capital is produced by labor; 
all capital is consumed. Can you reconcile these propositions ? 

8. "Capital, though saved, and the result of saving, is neverthe- 
less consumed. The word saving does not imply that what is saved 
is not consumed, nor even necessarily that its consumption is deferred." 
Explain. Who is the consumer ? Is the consumption usually deferred ? 

9. It has been said that the original formation of capital is due to 
abstinence or saving, but its permanent maintenance is not. What 
do you say to either statement ? 

10. Distinguish between saving and hoarding. 

11. Is the miser or the spendthrift the more useful member of 
society ? 

12. "The Chinaman lives economically. He saves and takes his 
savings back to his native land. Instead of being a wealth producer 
he acts as a leech upon the wealth of the nation, sucking in all that 
he can and taking it away to enrich the land of his ancestors. Better a 
band of spendthrifts than a colony of Chinamen." Comment. — T. 

13. "Extravagance, when practiced by millionaires, is a blessed 
thing. It causes a freer circulation of money, affords the laboring 
man work, feeds women and children, and affects, in fact, every 
industry, no matter how small." Do you agree ? 

14. " If a municipality could by contract get a task done for $10,000, 
but by hiring labor to do it could get it done for $40,000 it might still 
be wise to use the second plan. The money would still be in the 
city — and more of it than by the first plan." Comment. — T. 

15. A recent Secretary of the Navy, in defending large naval 
appropriations, wrote as follows: ^'It is a taking thing to say that 
$100,000,000 could be better spent for education or charity; and yet, 
on the other hand, $100,000,000 spent in the employment of labor 
is the very best use for which it can be spent. There is no charity in 
the interest of the popular welfare or of education so valuable as the 
employment of labor." Comment. 

16. Should we naturally expect a great fire to increase the amount 
of employment for working men generally ? Explain. 

17. Speaking of the Galveston flood, a writer said: "Fortunately, 



THE PRODUCTIVE PROCESS 19 

such events are not unmixed evils. Employment will now be found 
for many laborers and this benefit should not be forgotten or minimized 
by us." What do you think of the statement? 

18. Is a football celebration which results in the breaking of 
$200 worth of windows advantageous to laborers in general ? — T. 

19. Is it advantageous to laborers, temporarily or permanently, 
that there should be (i) large government expenditures for military 
purposes; (2) large government expenditures for improvements in 
transportation; (3) luxurious expenditure by the rich; (4) savings 
by the rich? (You are free to discuss these separately, or as one 
general question.) 

20. We often speak of withdrawing capital from one industry 
and putting it into another. What does this mean? How is it 
done ? — T. 

21. ''This equalizing process, commonly described as the transfer 
of capital from one employment to another, is not necessarily the 
slow, onerous, and a most impracticable process which it is often 
represented to be." What is the equaUzing process? and why is it 
or is it not slow and onerous ? — T. 



V. Organization and the Productive Process 

1. The Regime of Exchange-Co-operation 

2. Specialization 

3. The Apportioning of the Productive Factors 

4. Present Forms of Industrial Organization 

5. Modern Organization Exemplified by Certain Industries 

In the discussion of Land, Labor, and Capital in their relation to 
the productive process the main attention was given to facts and prin- 
ciples w^hich would hold true under practically any organization of 
society. The problem now before us is to examine the main facts of 
the present organization — to see how the forces we have been dis- 
cussing are actually utilized today. This present inquiry is not an 
inquiry into the wisdom or lack of wisdom of the present organization. 
It is merely an inquiry into the facts. 

I. The Regime op Exchange-Co-operation 

Everyone appreciates that the modern industrial society is an 
"exchange-society." Practically no one produces all, or even many, 
of the things he consumes. It is not as generally appreciated as it 
should be that this is in reality a process of co-operation, none the 



20 OUTLINES OF ECONOMICS 

less real because carried on unconsciously. No formal machinery 
has been set up as a conscious act, but, as Professor Taylor says, our 
co-operation is both effected and regulated by exchange. 

Questions 

1 . Why does not everyone make the same commodity ? 

2. How does it happen that the things produced are generally 
the things we want? 

3. Show how our co-operation is effected through exchange. 

4. Show how our co-operation is regulated by exchange. 

5. Adam Smith, in a famous passage in The Wealth of Nations, 
observes that every individual who, in pursuit of his own gain, directs 
his industry in such a way that the product may have the greatest 
possible value, is ''led by an invisible hand" to promote unintention- 
ally the public welfare. Should you accept as true the implication 
that exchange-co-operation completely reconciles the interests of 
individuals and the community ? Are individuals ever rewarded for 
actions which yield a present benefit to some, but are in the long run 
detrimental to society? 

6. Mention some of the advantages of exchange-co-operation. 

2. Specialization 

a) The Separation of Occupations 
h) The Division of Labor 

c) Territorial or Geographical Specialization 
i. Grouping of related industries 

ii. Grouping of many plants of the same industry 

d) How Far Specialization Can Be Carried Depends upon 

i. The nature of the industry 

ii. The extent of the market (Note the relation of transporta- 
tion to the extent of the market.) 
iii. Social institutions 
iv. Financial organization 

Questions 

1. Do the advantages of specialization apply to the use of capital 
and land as well as to the employment of labor ? 

2. Give examples from your own observation of (a) the division 
of labor; {b) territorial grouping of related industries; {c) territorial 
grouping of plants of the same industry. 



THE PRODUCTIVP: process 21 

3. What were the motives that led to the speciaHzation you have 
mentioned in answering questions (/;) and (c) under (2) ? 

4. Why can more be produced when the different operations are 
divided among many persons ? 

5. Give concrete examples of cases where specialization is limited 
by the nature of the industry itself. 

6. Can specialization be carried as far in bicycle repair shops as in 
bicycle manufacturing? Why or why not? 

7. Show specifically how specialization has depended on the widen- 
ing of the market. 

8. Is it in general more true that widening markets have led to 
specialization, or that the increased productivity of specialized 
industry has enlarged markets? 

o. Now-a-days one machine completes the process of pin-making 
which in Adam Smith's day occupied ten men. Has there been an 
increase or a decrease in specialization ? 

10. What new forms of speciaHzation and what enlargements of 
the market accompanied the transition from the handicraft system 
to the factory system ? 

11. Show how specialization of industry in respect to (a) products 
and {b) location, is related to the development of transportation. 

12. Cite instances where social institutions affect the degree of 
specialization. 

13. Show the relation of financial organization to the extent of 
specialization. 



3. The Apportioning of the Productive Factors 

The question of the apportioning of the productive factors is 
simply a question of the law of return. Up to the present time the 
law of return has been discussed in its application to land alone, and 
that under very rigidly assumed conditions. It is now to be noted that 
this law is one of general application. In discussing it the following 
distinctions must be considered: 

a) What is the unit of which the productivity is being studied ? 

i. A single instrument (instrumental returns) 

ii. Some industry taken as a whole (industrial returns) 

b) W^hat conditions are assumed as regards methods ? 

i. Unchanged methods (static laws of return) 
ii. Progress (dynamic laws of return) 

c) Are we employing measures of number and quantity, or value ? 

i. As regards the product 
ii. As regards the productive factors 



22 OUTLINES OF ECONOMICS 

Questions 

1. In what aspects does the principle of diminishing returns 
present itself to the business man today ? 

2. Give a concrete example of the way in which the principle of 
diminishing returns is taken into consideration by (a) the farmer, 
(b) the man who intends to build a skyscraper on a city lot, (c) the 
manufacturer of shoes. 

3. "This land used to produce 25 bu. per acre at 5 days' cost. 
Now it takes 7. That is, diminishing returns have set in." Point out 
the mistake. — T. 

4. A certain telephone central has switchboard equipment which 
took care of 900 subscribers at a total cost of $4,700 per annum. 
To care for 950 would cost $4,850. At what stage of returns is the 
plant ?— T. 

5. A certain engine has been in use for ten years so that its capacity 
to furnish power from a given amount of fuel has fallen off. Is that 
the same as saying that the engine is in the condition of diminishing 
returns ? — T. 

6. Canada can produce wheat at 50 cents a bushel while we 
cannot produce it for less than 75 cents. Consequently Canada will 
inevitably drive us out of the world-market for wheat. What prin- 
ciple is overlooked here? 

4. Present Forms of Industrial Organization 

a) Private Property and the Competitive Regime 

b) Entrepreneur ship and Capitalistic Industry 

c) The Size of the Most Efficient Unit 



a) Private Property and the Competitive Regime 

Questions 

1. Make a list of the various advantages that society in the past 
has derived from the institution of private property. 

2. Make a Ust of the disadvantages of private property. 

3. Is private property a natural, inalienable, inherent right, or 
a matter of social agreement ? 

4. Should the institution of private property be modified or aban- 
doned if in the judgment of society its disadvantages outweigh its 
advantages ? Have property-rights been limited in the past ? 

5. What do you regard as the ultimate justification of private 
property ? 



THE PRODUCTIVE PROCESS 23 

6. Compare the right of inheritance and the power of bequest 
as motives to industrial efficiency. 

7. Does freedom of contract mean freedom to make any contracts 
one chooses ? Is everyone free to run a saloon ? to practice law ? 
to establish a department store ? to conduct a lottery ? to sell cigarettes 
to minors ? to sell himself into slavery ? to fix cab-fares ? 

8. Make a hst of practical obstacles, as distinguished from legal 
restrictions, which limit industrial freedom. 

Q. Is our present system "industrial anarchy"? 

10. Are ^'laissez-faire'' and "competitive system" synonymous 
terms? 

11. Should there be any "presumption" either for or against 
"state interference," or should each case be decided upon its merits? 
What do you mean by merits ? 

12. Can you mention cases where the state takes part directly 
in industry today ? 

13. Are there any ways in which the state aids indirectly in industry 
today ? 

b) Entrepreneur ship and Capitalistic Industry 

i. The Individual Firm 
ii. The Partnership 
iii. The Corporation 
iv. Co-operative Enterprise (treated under " Social Reform ") 

Questions 

1 . Indicate the forces which have brought about the development 
in the form of entrepreneurship from the individual firm through the 
partnership, to the corporation. 

2. Why was it that the corporation did not become a common 
form of business organization until the nineteenth century? What 
were the usual forms of organization before that time ? 

3. What are the chief points of difference between a corporation 
and a partnership ? 

4. W^hat advantages has a corporation as compared w4th a partner- 
ship ? Are there any respects in which a partnership has advantages 
not possessed by a corporation ? 

5. What is a holding company? What are the advantages 
afforded by this form of organization ? 

6. Define common stock, cumulative preferred stock, treasury 
stock, senior bonds, underlying bonds, collateral trust bonds. 

7. With the aid of a financial dictionary draw up a list of at least 
12 kinds of bonds and explain each. 



24 OUTLINES OF ECONOMICS 

8. Explain how a corporation secures a charter. 

9. A corporation has outstanding $1,000,000 in 5 per cent bonds, 
$10,000,000 7 per cent preferred stock, and $10,000,000 common 
stock. Gross annual earnings are $11,950,000; total expenses for 
the year are $9,900,000, and depreciation of the plant amounts to 
10 per cent on a valuation of $11,000,000. What is the amount of 
net earnings, and how will this amount be distributed among the 
holders of the different securities ? 

10. In the case of the corporation described in the preceding 
question what would be the effect upon the dividends on the common 
stock if all the preferred stock were converted into 5 per cent bonds ? 
Would this be a wise move if the business were likely to fluctuate 
so that the net earnings of the corporation would be cut in half ? 

11. In 1896 the following situation was true: 



Company 


Common Stock 


Dividends 


A 


$3,000,000 


10 per cent. 


B 


2,000,000 


8 per cent. 


C 


1,000,000 


10 per cent. 



On January i, 1897, a holding company, D, absorbs all their stock, 
and in 1897 D gets, in addition to the former earnings, $500,000 
monopoly profits and $100,000 by saving in wastes of competition. 
What dividends could D pay if its capital stock were $6,000,000? 
Could D's stock be $3,000,000 ? If so, how ? 

12. What is meant by: {a) capitaUzation ; (b) capitalization on 
the basis of original cost of production ; (c) capitaUzation on the basis 
of cost of reproduction; (d) capitalization on the basis of earning 
capacity; (e) capitaUzation on the basis of expected earning capacity; 
(/") capitalization on the basis of cash contributed; (g) capitalization 
on the basis of tangible assets ? 

13. Should the basis of capitalization of a public service corpora- 
tion be different from that of a private corporation ? 

14. What difference is there between a corporation which floats 
stock at par with a capitalization based on earning capacity, and an 
individual who sells a prosperous business at a high figure because of 
its being prosperous ? 

c) The Size of the Most Efficient Unit 

Questions 

1. Is it Ukely that large factories will ever be devoted to portrait 
painting? Give reasons. 

2. For which of the following articles is large-scale production 



THE PRODUCTIVE PROCESS 25 

appropriate: hand-made shoes; machine-made shoes; furniture; 
nails; cut glass; orchids; millinery? 

3. Edison proposes to develop a method of housebuilding by 
pouring cement into a set of moulds which may be used over and over. 
Are such houses likely to be in demand ? Why ? 

4. Generalizing your answers to the preceding questions, what 
classes of products are likely to be produced on a large scale ? 

5. The following are sometimes claimed to be advantages of large- 
scale production: (a) saving of cross-freights; (b) running plants to 
full capacity; (c) economies in advertising; (d) utihzation of by- 
products; (e) saving in expenses of administration; (/") employment 
of high-grade technological experts and managers ; (g) development of 
foreign markets; (h) use of highly speciaUzed machinery; {i) control 
of patents; (7) maintaining a private insurance-fund. Do you think 
these alleged advantages are real? 

6. Classify the alleged advantages mentioned in the preceding 
question, showing the relation of each to (a) large-scale production, 
as attained in a single large plant; (b) combination, i.e., unified 
control of several plants in different localities; (c) monopoly; {d) 
integration of industry. 

7. Are there any disadvantages in large-scale production? 

8. Do you understand that all businesses are destined to become 
large-scale businesses ? 

5. Modern Organization Exemplified by Certain Industries 

a) Agriculture 

b) Transportation (with particular reference to railroads) 

c) Manufactures (with particular reference to trusts) 

No attempt is made at this point to treat the conditions of modern 
organization exhaustively. Agriculture, railroads, and the trusts 
form by no means an exhaustive list. Labor unions, employers' 
associations, co-operative associations, etc., are also examples of 
organization but are reserved for discussion elsewhere. The present 
discussion is designed to cover merely a few illustrative cases. 

a) Agriculture 

This industry is properly called one of our basic industries. It 
is the source of most of our food supply and also of many of our raw 
materials for manufactures. The following table gives some indica- 
tion of the part agriculture has played in the industrial life of the 
United States. 



26 



OUTLINES OF ECONOMICS 



Average size of farm (acres) 

Total farm area (million acres) . . 
Value of farm real estate (millions) 
Value of farm live stock (millions) 

Corn crop (million bu.) 

Wheat crop (million bu.) 

Cotton crop (million bales) 

Percentage rural population of 
total population 



1850 


i860 


203 


199 


294 

$3,272 

$544 
592 


407 
$6,645 
$1,089 

839 


100 


173 


2 


5 


87-5 


839 



1870 



153 

408 
$9,263 

$1,525 
761 

288 

3 
79.1 



1880 


1890 


134 


136 


536 


623 


$10,197 


$13,279 


$1,577 


$2,309 


1,755 


2,122 


459 


468 


6 


7 


77-4 


70.8 



146 

838 

516,614 

$3,075 

2,666 
659 



66.9 



Questions 

1. What causes make it possible for the percentage of our popula- 
tion engaged in agriculture to decrease steadily ? 

2. W^hy have many people left the farms for other pursuits? Is 
this migration likely to continue ? 

3. What reasons can you assign for the fact that large-scale 
production is not characteristic of this industry ? Do you think that 
the scale is likely to be increased in the future ? 

4. Agricultural experts tell us that by using present amounts of 
labor, land, and capital according to the most efficient plans of agri- 
cultural organization already known, the productive efficiency in 
this industry could be doubled in a year. Why is this not done? 
What forces are making in that direction ? 

5. Do you think the forces of custom, habit, and inertia are 
stronger in agriculture than in other pursuits ? 

6. Exactly what functions do you think the agricultural colleges 
perform ? 

7. Explain why land that sold for $2 per acre when it would pro- 
duce 75 bushels of corn, now sells for $100 per acre when it produces 
only 40 bushels. If this is characteristic of our agricultural land, has 
this natural resource increased or decreased ? 

8. When good means of transportation opened up markets for 
the produce of the western pioneers, what changes took place in 
agricultural organization ? 

9. Under what conditions are we apt to have diversified farming ? 
Single crop farming? 

10. Why were there no big bonanza farms when the Middle 
West was first settled ? Why did they appear later ? Why are they 
being broken up today ? 

1 1 . Why is agriculture in Europe more intensive than in the United 
States? 

12. What inventions and innovations have improved the con- 
ditions of farm life in recent years ? 



THE PRODUCTIVE PROCESS 27 

Transportation (with particular reference to railroads) 

i. The Development of the Railroad Net 

{a) The importance of technical and engineering considera- 
tions 
{b) The influence of geographical, geological, and climatic 

conditions 
(c) The beginnings of the railroad 
{d) The development of the system in the United States 

(i) The great relative importance of transportation in 

this country 
(ii) The reasons why the development was left to private 

capital 
(iii) The speculative and feverish character of the building 
(iv) The consolidation movement since 1869 
ii. Leading Characteristics of the Railroad Industry 
{a) The principle of direct and indirect cost 

(b) The many forms of competition 

(i) Of parallel lines 
(ii) Of round-about routes 
(iii) Of other means of transportation 
(iv) Of cities and markets 
{c) The quasi-pubUc nature of the industry 
{d) The tremendous importance to society 

(i) In strengthening and cheapening the productive 

processes 
(ii) In equalizing the cost of hving in different parts of 

the world 
(iii) In making concentration of population possible 
iii. Results of These Characteristics 

{a) The difficulty of arriving at any scientific basis of rate- 
making 
{h) The constant pressure upon managers to develop more 
traffic 

(c) The rejection of competition as the proper means of 
regulation 

{d) The necessity of some form of public supervision 
iv. Government Regulation in the United States 
{a) Agencies 

(i) State regulation 
(ii) Federal regulation 
{h) Periods 

(i) To 1870, the period of governmental favors 
(ii) 1870 — , the period of reaction and supervision. 



28 OUTLINES OF ECONOMICS 



Questions 



1. What has been the bearing upon the development of railroad 
transportation in the United States of (a) the multi-tubular boiler; 
(b) forced draft; (c) cheapened production of steel ? 

2. Was the flimsy character of early railroad construction in 
America beneficial or detrimental ? 

3. Have American railroads in general followed or directed the 
course of settlement of the country? 

4. Would private capital have been invested in railroad build- 
ing if the chance of extraordinary gain had been greater in other 
industries? To what extent may further railroad-building be 
expected ? 

5. What was the "Whiskey Rebellion" ? If railroads had existed 
at that time would it have occurred ? 

6. Are local famines likely to be as serious in the future as they 
have been in the past? 

7. Has railroad transportation relieved or aggravated the problem 
of great cities? 

8. Has the American railroad in greater degree benefited the 
Dakota farmer or the London consumer? 

9. If a railroad is already in existence and trains are running, 
what added cost would the railroad incur if it hauled a five-pound 
box from Chicago to New York ? 

10. Would it be good business poUcy for the road to haul such a 
box at a rate only a little in excess of this added cost if it could get 
no more for the service ? Would it be good policy to haul all traffic 
at such rates? 

11. Suppose empty cars were being hauled in a certain direction. 
Would a railroad be justified in offering to haul traffic in that direction 
at very low rates? If so, under what circumstances? If not, w^hy 
not ? Would your answer be the same from a social point of view as 
from the point of view of the railroad management ? 

12. Can you think of any circumstances under which it would be 
wise (a) from the railroad's point of view, (b) from the social point of 
view, for a railroad to charge less than direct cost ? 

13. In the following analytical table of railroad expenses (divi- 
dend payments not considered) column I indicates, by items, the 
percentage of total expenses which are independent of volume of 
traffic; column II indicates, by items, the percentage of total expenses 
which are dependent upon volume of traffic; column III indicates 
the proportion of total expenses represented by each item. The 
figures in column III are obtained by adding the figur s of column I 
and column II. 



THE PRODUCTIVE PROCESS 



29 





I 


II 


III 


Fixed expenses 


25 1 25 


General operating expenses 

Maintenance of way and structures 


3 
10 

7 
14 

34 



6 


3 
1 6 


Maintenance of equipment 




Conducting transportation 

Total operating expenses 


28 : 42 
41 75 


Total 


59 


41 100 



a) From a study of the above table should you expect a railroad 
to iight strenuously to keep traffic? to gain new traffic? Why do 
you answer as you do ? 

b) Work out a concrete case showdng that a railroad might be 
wise in charging only 42 per cent of the total cost of hauling. If it did 
so, would that mean that some other traffic would be charged unduly 
to make up for it ? 

14. W^ork out a concrete case where "cost of service" gives no 
guidance in rate-making. Do the same for "value of service." 

15. Formulate a statement of what "charging what the traffic 
will bear" means. 

16. Rates on Cahfornia and Florida fruits are made such as to 
enable these fruits to compete even in each other's territory. How 
can this be done ? 

17. Rates on California lemons are made so low that they can 
compete wdth lemons from Sicily. Lumber from Oregon competes 
in Boston with lumber from Maine. How can this be done ? 

18. Suppose you w^ere a traffic manager and a shipper came to 
you with a commodity recently brought into market, asking you to 
name a rate. What conditions should you need to take into account ? 

19. It is stated that the most serious defect of the Inter-state 
Commerce Act is the attempt to prohibit, at one and the same time, 
discriminations and pooling. Explain. 

20. Can you apply the gist of the above questions to any modern 
industry where indirect cost is a large part of total cost ? 



c) Manufactures (with particular reference to the trust) 

i. The origin of the trust problem 
ii. The trust movement in the United States • 
iii. The promotion and organization of a trust 



so OUTLINES OF ECONOMICS 

iv. Analysis of the causes for the growth of trusts and the results 

of the trust organization 
V. The lines of procedure in dealing with the trust problem 



i. The Origin of the Trust Problem 

Monopolies of one form or another have existed from the earliest 
times, but the present-day trust and the problems to which it gives 
rise are essentially modern. The industrial world is always changing 
— is in a constant state of evolution. The changes in the industrial 
world have been taking place so rapidly that our laws, business 
ethics, and social institutions have fallen behind and have become 
antiquated. Hence the problem. 

Fundamentally the trust is the product of that stage in the evolu- 
tion of industrial society which ushered in what is commonly called 
modern capitalistic industry. The movement began in England, where 
it became known as the Industrial Revolution, and later, through a 
slow evolution rather than revolution, spread to the other more 
advanced nations. Improvements in transportation and many me- 
chanical inventions worked together to bring in the factory system, 
with a constantly enlarging scale of production and ever-increasing 
severity of competition. The characteristics of this capitalistic 
industry were first revealed in the railroad business, but soon they 
appeared in other industries. Among the more important of these 
characteristics are the following: 

a) The corporation, which faciUtated the gathering together and 
direction of the vast sums of capital now required for successful 
business undertaking, became the dominant form of business organiza- 
tion. Under the corporate form of organization there appears a 
growing separation between investors and those who control the 
investment, thus affording the latter opportunity for manipulation, 
''high finance" methods, etc. 

b) Localization of industry became more and more marked with 
the greater division of labor. 

c) Integration of industry went hand in hand with larger scale of 
production. 

d) Fierceness of competition increased as the size of a concern 
expanded and the number of rivals decreased. 

e) Centralization of control was hastened by the growing severity 
of competition and the hope of monopoly profits. 

Out of these conditions came the modern trust. 



THE PRODUCTIVE PROCESS 31 

Questions 

1. Explain carefully why each of these characteristics of modern 
capitalistic industry should lead to the growth of trusts. 

2. What is a trust? 

3. Are all trusts monopolies? Are all monopolies trusts? Is a 
trust a corporation, a partnership, an association ? 

ii. The Trust Movement in the United States 

The trust movement in the United States may be divided into 
three periods according to the form of organization which dominated 
in each. 

1870-80, pools; 1880-90, trusts (trustee control); 1890- , cor- 
porations, holding companies. 

Up to 1897 the number of trusts was comparatively small. Most 
of the existing trusts were formed between 1898 and 1902, when 
industrial and financial conditions were especially favorable to their 
formation. Since 1902 the movement has been much slower. 

Questions 

1. What is a pool? a trust (in the original sense of the term)? 
a holding company? 

2. Why were the pool and the trust abandoned and the holding 
company adopted ? 

3. Is the movement tow^ard combination still going on? Is it 
likely to continue in the future ? 

iii. The Promotion and Organization of a Trust 

Questions 

1. What is the function of a promoter? 

2. Explain the steps by which a trust is organized. 

3. What is meant by the capitalization of a trust? 

4. On what basis is the amount of capitalization determined? 

5. What is stock-w^atering ? Why is it resorted to? 

6. Does stock- w^atering harm the public? the investor? 

7. Would the harm be prevented by full publicity ? 

8. Explain the work of the underwTiter. 

iv. Analysis of the Causes for the Growth of Trusts and the Results of 
the Trust Organization 

The main causes of the growth of trusts may be stated as — 
a) The advantages of large-scale production. 



32 OUTLINES OF ECONOMICS 

b) The prospect of obtaining exorbitant monopoly profits 
(i) By control of selling price 

(2) By superior strategic position in bargaining, e.g., with 
the seller of material or with labor, etc. 
6-) The saving of the wastes of competition, e.g., the better 
adjustment of production to demand, saving in adver- 
tising, etc. 
The following have been minor causes: 

d) Special privileges, e.g., railway rebates, tariff favors, etc. 

e) Methods of competition, e.g., factor agreements and discrimi- 
nating prices. 

/) Promoters' profits, made in organizing trusts. 



Questions 

1. The following classification of monopolies has been made by 
Bullock: 

a) Personal abiUties 
h) Legal monopolies: 

(i) Private, as patents, copyrights, etc. 

(2) Public, as postal business, fiscal monopolies, etc. 

c) Natural monopolies: 

(i) Control of raw material. 

(2) Consumption limited to locality of the plant, e.g., gas, 
railways, etc. 

d) Capitalistic monopoHes, agreements, pools, etc. 

Does this classification satisfy you ? Could you contend that capital- 
istic trusts are '' natural " ? 

2. "The trust carries the germ of its destruction. The alleged 
advantages of large-scale production are fictitious and the savings 
of the wastes of competition are more than offset by the wastes of 
monopoly. Abolish special privileges and improper methods of 
competition and the trust will die of itself." Do you agree? If 
you disagree, do you nevertheless see elements of truth in the quo- 
tation ? 

3. "The trust is efficient from the social point of view." Why or 
why not ? 

4. " The trust is merely another instrument of capitaHstic exploita- 
tion. ' ' Why or why not ? 

5. "The trusts of today will lead to the Great Trust, government 
ownership of all industries." Why or why not? 

6. What are the chief advantages of large-scale production? 
What are the wastes of competition which can be saved ? Are either 
of these gains to be obtained without monopoly ? 



THE PRODUCTIVE PROCESS SS 

7. Is the tariff the ''mother of trusts"? If not, to what extent 
is it responsible for the trusts ? 

8. Would the aboHtion of the tariff destroy trusts or result in the 
formation of international trusts ? 

9. What forms may a railroad rebate take? In what way does 
it foster trusts ? 

ID. What are factor agreements ? Are they harmful ? 

11. Should the practice of discriminating prices be prohibited? 
Is this practice confined to the trusts ? 

12. Do trusts tend to raise prices? By what methods can this 
be determined ? 

13. How do trusts affect the bargaining position of the laborer ? 

14. Are there social or political evils which follow from the growth 
of trusts ? 

15. Is the question of the protection of the minority stockholder a 
''trust problem" or merely a "corporation problem" ? If the latter, 
can you mention other questions which could be grouped with it as 
being corporation problems ? 

V. The Lines of Procedure in Dealing with the Trust Problem 

We have surveyed the origin of the trust problem, the causes 
leading to the growth of trusts, and the results w^hich follow therefrom. 
If the causes of the trust are based on social efficiency and if the results 
are altogether good the trusts should be let alone. If the reverse is 
true, they should be aboUshed. If they have possibilities for both 
good and evil, a policy of regulation which will conserve the good and 
prevent the evil should be adopted. The wise procedure will be to 
take advantage of our study of the causes for the growth of trusts 
and thus strike at the root of the trouble by doing away with such 
causes as do not lead to a growth based on social efficiency. 

Questions 

1 . What elements of good and evil do you see in the trusts ? 

2. Which of the above-mentioned policies should be chosen? 
Why? 

3. What has been the policy underlying the trust legislation of 
this country in the past, and what has been accomplished ? 

4. Why has not more been accompHshed? Was the poUcy a 
wise one? 

5. Is potential competition an adequate solution ? 

6. What other remedies have been suggested? Do you believe 
them to be adequate ? 

7. Do you think further legislation is needed? If so, what sug- 
gestions can you offer for further legislation ? 



D. EXCHANGE 

I. Markets 

II Value 

III. The Mechanism of Exchange 

IV. International Trade 



We have seen that the modern industrial society is an exchange 
society. In this section we shall study the exchange processes in more 
detail, or, speaking more accurately, we shall study industrial society 
from the point of view of exchange. There is, of course, no clear 
line of demarcation between exchange and the productive process, 
or between exchange and the distributive process. With such intri- 
cate, interacting, and complex phenomena it is, however, good scien- 
tific method to take first one point of view and then another, and 
finally to seek to deal with the matter as a whole. 

I. Markets 

We have come to assume "market" as a factor in our industrial 
life. We make goods "for the market"; we "go to the market"; 
we "study the market." These expressions could be multiplied 
indefinitely. Just what do we mean by "market," and what is the 
function of the "market"? 

Questions 

1. When people congregate at a certain place and exchange goods 
at barter, can we say that they constitute a market ? 

2. Is it a market when you buy chickens from a farmer out in 
the country ? If so, w^hat constitutes the market ? Is it the place ?. 
the operation ? 

3. Is the retail grocery store a market? For whom? Is the 
place the market? 

4. Is the wholesale grocery store a market ? For whom ? Is the 
place the market ? Suppose this wholesale grocery keeps no stock on 
hand but consists merely of an office, an office force, and means of 
communication with importers and producers and customers, is it a 
market ? 

5. Is the office and store of the importer a market? 

34 



EXCHANGE 35 

6. When you speak of the tea market do you mean the retailers' 
market ? wholesalers' market ? importers' market ? 

7. Sometimes a distinction is made between a local market and 
a world market. What distinction exists? Can you name any 
goods which have a w^orld market ? Any which have a local market ? 
Under what conditions will a good have a local market alone ? 

8. Is a stock exchange a market? A produce exchange? If so, 
for whom ? 

Q. Draw up a definition of market. 

10. Show Wv the market, as you have defined it, has a function 
in the industrial world. 

11. When we say wt '' watch the stock market," just what do 
we mean ? 

12. Where is the market that establishes the market price of 
wheat ? 

II. Value 

1 . The Nature of Value and Price 

2. Demaitd and Supply in Relation to Value 

3. The Marginal Utility Explanation of Value 

4. Analysis of Demand 

5. Analysis of Supply 

6. General Questions on Value 



I. The Nature of Value and Price 

The term "value" is used in many senses. Sometimes it is used 
in a subjective sense, that is, as value-in-use. Sometimes it is used 
as implying ethical considerations. To the economist value always 
means power in exchange. To him the study of value is a study of 
the terms according to which one commodity is given for another and 
it is also a study of the part that value plays in the economic process. 

Price is value expressed in terms of some one good taken as a 
standard. In our everyday experience wdth economic matters we 
are more likely to talk of price than of value. 

Questions 

1. "Whiskey is not wxalth. It has no permanent value for 
society." In what sense is the term value used ? 

2. "It was a valuable lesson for me." In what sense is the term 
value used ? 



36 OUTLINES OF ECONOMICS 

3. A mercantile establishment advertises ''the best values in 
the city." What is meant here by value ? 

4. Could a thing have value unless desired ? unless scarce ? 

5. Draw up a sentence in which value is used in the sense in which 
the economist uses it. 

6. Would a bag of gold have value to a shipwrecked sailor on a 
rocky and deserted island ? Would a loaf of bread ? 

7. What good is actually the standard in price calculations today ? 

8. Just what is a $5 gold piece ? If gold should go up in value, 
would the government put a different quantity of gold in the $5 
piece ? If wheat should rise in value, would there still be 60 pounds 
in the bushel ? 

9. If gold increased so much that its value fell, what would happen 
to prices ? 

10. Could X change in price and still have the same value relation 
to a, b, and c that it had before ? 

11. Can there be a general rise or fall of values as the economist 
uses the term ? 

12. Can there be a general rise or fall of prices ? 

13. If prices fall, is the general wealth of the country any less? 
Are there as many articles of value as before prices fell ? 

14. Is value an absolute property of things? Is the expression 
"intrinsic value" defensible — 

a) As an expression meaning the value of the substance of 
which a thing is made: e.g., "The intrinsic value of a silver 
dollar is 47 cents" ? 

b) As an expression signifying that value is inherent in a thing ? 

15. What is market price? Cite instances where market price 
remains the same over considerable periods of time. Cite instances 
where market price fluctuates rapidly. 

16. Might farmers accept 3 cents a quart for strawberries some- 
times ? Do you think they could accept as little as this for every 
quart they sold and still remain in the business ? 

17. What is meant by normal price? 

18. How could normal price be determined in the case of a com- 
modity in the production of which much machinery is used; espe- 
cially if improvements of the machinery are being rapidly and continu- 
ally invented and applied in new plants or in the newer machines 
of estabhshed plants? 

2. Demand and Supply in Relation to Value 

The answer to the questions " Why does so much of this commodity 
exchange for so much of that? Why not for more? Why not for 
less ? " is to be found in the relationship existing between demand and 



EXCHANGE 



37 



supply. Since the factors which go to make up demand and those 
which go to make up supply are exceedingly numerous and intricate, 
a discussion of these determinants is postponed to sees. 4 and 5 
below. At present we shall simply assume a certain demand and a 
certain supply and we shall study the result in value relations. 

If we were omniscient we could tell how many units of a good 
would be demanded in a community at different prices. Suppose 
it ran as follows: 

At ic. per lb. there would be taken 1,000 lbs. 



" 2C. 








u 


u 


900 


" 3C. 








u 


ii 


800 


'Uc. 








u 


u 


700 


" 5C. 








u 


ii 


600 


'' 6c. 








u 


ii 


500 


a ^ 








li 


i i 




7c. 












400 


" 8c. 








u 


ii 


300 


" 9C. 








u 


i 


200 


" IOC. 








u 


ii 


100 


ieman 


d schedule 


'. If pi 


otted, 


it 


would 



curve.) 

If we were omniscient we could tell how many units of a good 
would be supplied in a community at different prices. Suppose it 
ran as follows: 

At IC. per lb. there w^ould be supplied 100 lbs. 



" 2C. ' 










200 


" 3C. ' 










300 


" 4C. ' 










400 


" 5c. ' 










500 


" 6c. ' 










600 


" 7c. ' 










700 


" 8c. ' 










800 


" 9C. ' 










900 


'^ IOC. ' 










1,000 



(This is a supply schedule. If plotted, it would give a supply curve.) 



Questions 

1. Write out a definition of a demand schedule; of a supply 
schedule. 

2. Plot the curves spoken of above, fusing them into one diagram. 

3. At what price w^as the amount which would be supplied at 
that figure just absorbed by the amount which w^ould be demanded 
at that figure ? 



38 OUTLINES OF ECONOMICS 

4. Can you establish that this price is the market price which 
will prevail under the assumed circumstances ? The demand schedule 
and the supply schedule given are assumed to be actual ones, whether 
competition is perfect or not. 

5. Can there be more than one price for a given commodity in the 
same market at the same time ? Why or why not ? 

6. If we should assume a different (and increased) demand 
schedule, would that fact alone increase supply ? 

7. Will doubling the demand for a good double its value? .What 
is meant by doubling the demand ? 

8. If prices depend upon demand and supply, how is It possible 
for stores to have a one-price system ? 

9. Can you speak of the amount demanded independent of price ? 
Can you so speak of the amount supplied? 



3. The Marginal Utility Explanation of Value 

In recent years the doctrine of marginal utihty has been much 
used as an explanation of value. It has been severely criticized, 
but an exposition of the doctrine is justified by (a) the point of view 
it contributes; {b) the fact that the student in his reading is certain 
to meet with the terminology of this doctrine. 

Marginal (or final) utihty is the utility of the least important incre- 
ment of supply. 

Note. — Remember the law of diminishing utility. 

The principle formulated . by the "marginal utility theorists" 
may be put as follows: 

The market price of a commodity is determined by the valuation 
of the marginal purchasers, i.e., those who would refuse to purchase 
if any increase in price took place. To these purchasers the marginal 
utility of the commodity is just equal to that of the money required 
to purchase it. Thus it is frequently said that market price is deter- 
mined by marginal utihty. 

If the conditions of supply were to change, another set of purchasers 
would be placed in the marginal position, and would determine price 
by their valuations. 

It is obvious that the above statement of the marginal utihty 
explanation of value is in complete accord with the demand and supply 
theory. That theory does not deny that those purchasers who are 
ready to drop out when prices rise are in a position to exert a direct 
influence upon price. The supply and demand theory lays emphasis 
upon the entire volume of demand; it takes for granted variability 
of part of the demand. The marginal utihty theory lays emphasis 



EXCHANGE 39 

upon the variable part of the demand; the existence of a large unvary- 
ing demand is taken for granted. 

Questions 

1 . Is marginal utility the same as total utility ? 

2. Is marginal utility the utility of the last increment of stock ? 

3. Define: marginal buyer, marginal seller, marginal producer, 
marginal cost. 

4. Write out a statement harmonizing the marginal utility doc- 
trine with the demand and supply doctrine. 

4. Analysis or Demand 

a) Determinants of Demand 

h) Some of the Forms or Manifestations of Demand 

In sec. 2 we saw that price-making forces work themselves out 

through demand and supply. At that time we assumed demand. 

We must now examine the forces which go to make up demand, as 

well as some of the forms in which it appears. 

a) Determinants of Demand 

i. Desire 

ii. Effectiveness of Desire — ^Purchasing Ability 
iii. Number of Persons Affected. 



i. Desire 

First of all, if a good is to be demanded it must have utihty. Men 
desire it because it will contribute to the satisfaction of wants. 
Review in this connection the section on economic wants, motives, 
and choices. 

fc- Questions 

1. Draw up a list of reasons why one person's subjective estimate 
of a good may vary from that of another person. 

2. Will the intensity of the desire vary with an increase in the 
number of units of a good? 

3. Do people sometimes buy a thing at a high price who would 
refuse to buy at a low price ? Why ? 

4. "It is easy for the economist to say that people spend their 
money so as to get the most good out of it, but we know they do not. 
Frequently people spend for ornaments and showy things." Com- 
ment. — T, 



40 OUTLINES OF ECONOMICS 

5. Do goods tend to be less valuable when out of style ? Why ? 

6. What is the value of an undetected counterfeit $10 bill ? 

7. Do the real qualities or the supposed qualities of -a good 
influence people? 

8. Does the possibility of the availability of a satisfactory sub- 
stitute ever affect the desire for a good ? 

9. Is the desire for a good ever reflected or derived from the 
desire for another good? If your answ.er is yes, indicate of what 
classes of goods this statement is true. 

10. Does the utility curve descend more rapidly in the case of 
some goods than in the case of others ? Give instances. 

11. Suppose a sudden doubling of aU goods (by a miracle, if you 
choose). Would values be affected? 

12. Can you cite cases where one good is desired for many pur- 
poses, i.e., where one good tends to satisfy many wants ? 

13. Can you cite cases where one good will be desired only when 
it can be had in connection with some other good ? 

14. Win desire alone determine value? Does a diamond satisfy 
a greater want than a loaf of bread ? Why has the diamond greater 
value ? 



ii. Effectiveness of Desire — Purchasing Ability 

Objective demand cannot be based upon desire alone. In an 
exchange process, purchasing ability or effectiveness must accompany 
the desire. 

Questions 

1. Does the penniless, hungry tramp "exercise demand" for 
bread in the bakery ? Does purchasing ability imply the possession 
of that which we call money ? 

2. What is meant by saying that a person can demand only when 
he supplies ? 

3. Can a man be a consumer and yet not be a producer ? 

4. Is a general over-production possible ? 

5. "The destruction of wealth has one compensation in that it 
increases demand for goods." Comment. — T. 

6. "Demand in general would be increased if employers would 
raise wages." Would this increase the total output of products? 
Would it increase total demand? Would it cause a different dis- 
tribution of demand ? — T. 

7. "Rich people who make commodities for themselves diminish 
by just so much the demand for other people's goods and so are the 
enemies of producers in general." Comment. — T. 



EXCHANGE 41 

8. "Rich people who produce goods or services for the market 
(e.g., teach) increase by just so much the supply of goods and so work 
harm to producers in general." Comment. — T. 

9. Does total demand equal total money ? If all money were 
wiped out of existence would demand disappear? 

10. Can an individual buy more than he sells in the long run ? 

11. The irrigation projects of the federal government are opening 
up for settlement large tracts of land that were formerly desert. Will 
the settlement of these tracts increase the demand for products of 
other parts of the country? How would you proceed to determine 
the extent of this increase, if any ? 

12. "Demand for a good is made up partly of the supply of other 
goods." Why or why not ? 

13. "Every true friend of labor condemns producing goods by 
convict labor. It increases supply of commodities without increas- 
ing demand and so diminishes the employment available for honest 
laborers who keep out of prison. A strange situation surely." Com- 
ment. — T. 

14. It seems to be clear that the effectiveness of a man's desire 
depends (at least in part) upon his abihty to offer something in 
exchange. Will it also depend upon his willingness to offer this 
something ? If so, upon what will this willingness depend ? 

15. Is desire or purchasing abiUty the more fundamental factor 
in demand ? Which of the two is more closely related with conditions 
of supply? 

iii. The Number of Persons AJfeded 

This is really a matter of extent of the market and is so obvious 
as to require no extended treatment. The demand schedule of society 
is a composite of the demand schedules of individuals. Construct 
a series of individual demand schedules and fuse them into one for 
the society. 

b) Some of the Forms or Manifestations of Demand 

i. Elastic and Inelastic Demand 

ii. Derived Demand 
iii. Composite Demand 
iv. Joint Demand 



i. Elastic and Inelastic Demand 

Demand may be elastic or inelastic, i.e., the amount demanded 
may change readily or slowly with change of price. 



42 OUTLINES OF ECONOMICS 

Questions 

1. Is the demand for the following elastic or inelastic: diamonds, 
salt, tobacco, beef, shoes, manual labor ? 

2. In which country is the demand for rice the more elastic, 
Japan or the United States ? 

3. May the demand for a given commodity be elastic at one price 
level and inelastic at another? Illustrate. 

4. Is the demand for necessities elastic or inelastic? Does it 
make a difference if there are satisfactory substitutes available ? 

5. Draw up schedules illustrating elastic and inelastic demand. 
Plot them. 

6. Is demand elastic in the case of a commodity which is so cheap 
that the users are near the point of satiety ? 

7. Could a commodity be subject to an elastic demand for one 
purpose or want, and to an inelastic demand for another purpose — 
all at the same price ? 

8. Does the elasticity of demand depend largely upon the ease 
with which other commodities may be substituted for it ? 

9. Draw up a series of general statements or propositions defining 
the circumstances under which demand will be elastic or inelastic. 

10. Work out a case of the demand of different classes of a com- 
munity (rich, middle, poor) for some well-known commodity. Draw 
up a separate schedule for each class, trying to make it typical. See 
whether each schedule is elastic or inelastic. Combine these schedules 
so as to show the total demand of the whole community and observe 
whether it is elastic or inelastic. 

11. Does advertising affect elasticity of demand? 

ii. Derived Demand 

Very commonly, the demand for a commodity is a derived demand. 
Producers' goods afford examples. Our demand for them is really 
derived from our demand for their products. Some call it a case of 
derived value. Still demand and supply determine value; but the 
demand in this case is of the kind indicated. 

Questions 

1. Mention several concrete instances of derived demand. 

2. What relation to this matter has question 9 under the topic 
"desire" ? 

3. Try to think out the bearing of derived demand upon the dis- 
tributive process; e.g., is the demand for labor a derived demand? 
If so, will it have a bearing on the principles underlying wages? 
How as to rent and interest? 



EXCHANGE 43 

iii. Composite Demand 

Demand takes at other times the form of composite demand; 
i.e., one thing is wanted for many purposes. Thus corn is wanted 
for bread, for stock feeding, for starch manufacture, for glucose, and 
for the distilUng of alcohoL 

Questions 

1. Work out several other examples. Will this particular form 
of demand have any bearing upon wages? i.e., is the demand for 
labor of this character ? 

2. What question under the topic "desire" has a bearing u])on 
composite demand ? 

iv. Joint Demand 

Joint demand exists in case the demand for one good involves in 
practice a demand for another also. Thus demand for lumber 
usually entails a demand for nails. 

Questions 

1. Work out several cases. 

2. Show how extremely wide the application of this principle is. 

3. Try to work out the effect of a sudden increase of supply of 
one of these goods upon the value of the other; e.g., automobiles 
and gasoline. (See Carver, Distribution of Wealth, 148.) 

4. Try to think out the consequence of this as regards distribution 
of wealth. 

5. Are many cases of joint demand also cases of derived demand ? 

6. What question under the topic "desire" has a bearing upon 
joint demand ? 

5. Analysis of Supply 

a) Meaning of Supply 

b) Temporary v. Long-run Conditions of Supply 

c) Determinants of Supply 

d) Some of the Forms or Manifestations of Supply 



a) Meaning of Supply 

Questions 

1. Can one speak of the amount supplied independent of price ? 

2. Does "supply" mean actual supply, or potential supply, or 
both? 



44 OUTLINES OF ECONOMICS 

3. Are supply and stock the same? Does stock include the por- 
tion in the hands of consumers ? Does supply ? Can stock ever 
exceed supply? Can supply ever exceed stock? Does it in the 
case of sales for future delivery ? 

4. Construct a series of individual supply schedules. Fuse them 
into one schedule for society. • 

b) Temporary v. Long-run Conditions of Supply 

It has become customary to differentiate between temporary and 
long-run (sometimes called normal) conditions of supply. To some, 
the temporary (market) conditions are tl e only ones of real, scientific 
significance. These writers question whether in an evolutionary 
society there is any such thing as a normal. Most writers contend, 
however, that while the market conditions are significant, back of 
these conditions are others of more permanent significance. To 
these writers normal or "underlying" conditions furnish the back- 
ground. The market conditions form a pattern, so to speak, on this 
background. 

Questions 

1. If you were leaving college might you sell for fifty cents a 
new book that cost you two dollars ? Are publishers likely to sell 
this book for fifty cents as a permanent poHcy ? 

2. If perishable goods are thrown into a market in large quantities, 
are they likely to sell at a price considerably below what a farmer could 
accept as a permanent matter ? 

3. Why does the price of wheat in the United States generally 
fluctuate between certain limits? Why does it not rise to $10 a 
bushel ? Why does it not fall to 10 cents a bushel ? Why does it 
fluctuate at all ? 

4. Why do not stores sell goods regularly at as low a rate as they 
use on bargain sales ? 

c) Determinants of Supply 

i. Physical Determinants 

ii. Social Determinants 

iii. Monopolistic Limitation 

iv. Cost of Production 

This section is concerned with an attempt to analyze the forces 
lying back of supply. The method of treatment is probably self- 
explanatory. 



EXCHANGE 45 

i. Physical Determinants 

(i) Relatively Fixed Stock — Consumers' Goods 
{a) Non-producible Goods 
{b) Producible Goods (of which the stock is permanently 

excessive; e.g., copies of a novel which was unsuccessful) 
{c) Producible Goods (of which the stock cannot be increased 

for a considerable period; e.g., wheat, between two harvests) 

(2) Relatively Fixed Stock — Producers' Goods 

(3) The Character of the Commodity 



Questions 

1. Suppose that as regards a certain kind of rare coin, A would 
buy one at $100; B, one at $90; C and D, one each at $80; E, F, 
.and G, one each at $60. If, now, seven are to be disposed of in a 
competitive market, what will the price be ? Does cost of production 
affect the situation ? 

2. In the case of old spinning wheels what would normal price 
mean? Would cost of production have a definite relation to price 
in such a case? 

3. "The market price and the normal price of such goods is 
determined by demand and supply, or, in the terminology of the 
marginal utility school, by marginal utiHty alone." Why or why 
not? 

4. "In case of a novel which w^as unsuccessful, marginal utility of 
stock determines value." Why or why not?— T. 

5. How could you determine the price you should ask for a piece 
of agricultural land which you own ? 

6. A $1,000 government bond pays 2 per cent interest. What 
would you pay for the bond if the usual rate on such investments 
were i . 9 per cent ? — T. 

7. Does cost of production determine the price of land in Okla- 
homa when first opened for settlement ? What does determine it ? 

8. If it takes two years to build a steel mill, will this have a bearing 
upon the value of steel mills in case of a sudden increase in the demand 
for steel ? Why ? 

9. How is it possible to corner the market in wheat ? Cannot 
the supply of wheat be increased? 

10. Does the character of the commodities cause the conditions 
of supply of strawberries to be different from those of granite blocks ? 
Why or why not ? 

11. "In the case of perishable goods, price is determined by the 
marginal utiHty of the stock." Why or why not ? 



46 OUTLINES OF ECONOMICS 

12. Find out, by making a list of the cases where the principle 
applies, whether the character of the commodity is an important 
element in supply determination. 

ii. Social Determinants 

(i) Formal Social Control 
(2) Informal Social Control 

Questions 

1. Does legal limitation of the hours of labor affect supply of 
labor ? May it in some cases actually increase labor supply ? 

2. Show how labor unions may act in determining supply of labor. 

3. Draw up a Ust of cases where formal sodal control acts as a 
determinant of supply. 

4. Does the pure food law tend to affect the supply of certain foods ? 
Why or why not? 

5. Explain prices of theater tickets, football tickets, physicians' 
fees. 

6. Do men ever abstain from supplying a certain good because 
to do so would cause them to lose the esteem of their fellows ? 

7. Does a prohibition law which is to some extent evaded affect 
the price at which liquor is sold in the territory affected ? 

8. Can you cite cases where custom, habit, ignorance, affect 
the supply of goods ? 

9. Which of the above questions deal with formal social control ? 
Which with informal control ? 

iii. Monopolistic Limitation 

Questions 

I. Suppose a monopolist could know in advance the demand 
schedule and the cost schedule of his commodity. Where would he 
fix the price in the following case ? 

Cost Schedule Profit—? 

10 at $500 



Demand Schedule 


10 at $1,000 


20 


800 


30 


700 


40 


600 


60 


500 


80 


450 


100 


400 



20 


460 


30 


450 


40 


430 


60 


425 


80 


420 


100 


41S 



2. From the evidence of this illustration work out a general prin- 
ciple to explain monopoly price. 



EXCHANGE 47 

3. Formulate a general statement of the relation of monoi)oly 
price to elasticity or inelasticity of demand. 

4. How would the general principle of monopoly price (Proljlem 
2) be modified in the case of a commodity for which there is an avail- 
able substitute not controlled by monopoly ? 

5. How great is the power of a monopolist who deals in the neces- 
sities of life ? In the luxuries of life ? 

6. How great is the power of a monopoUst who has control of 
natural resources? 

7. "In the case of a monopolized good cost of production does not 
affect price." Comment. 

8. A piano manufacturer buys out all his competitors. Can he 
now sell the former aggregate output at an advanced price ? Why ? 

9. How effective in restraining monopoly do you think potential 
competition is ? 

10. Professor Taylor says, "The normal price of goods produced 
by a capitalistic monopoly tends to approximate the cost of produc- 
tion to outsiders, usually remaining, however, somewhat above such 
cost." Comment. 

11. Suppose that of the price charged by a monopolist for his 
product 5 per cent is profit. He now raises the price 5 per cent. 
What per cent will this increase his profit, assuming sales to remain 
the same ? Will sales fall off very greatly in practice ? — T. 

iv. Cost of Production 
(i) Constant Cost 

(2) Increasing Cost 

(3) Diminishing Cost 

By many writers the term "cost of production" is taken to mean 
the sacrifice or effort involved in production. When they speak in 
terms of entrepreneur's outlay they use the expression ''expenses 
of production.'' Their use of terms has been criticized on the grounds 
of (a) popular usage, (b) point of view; i.e., it is contended that in 
economics outlay and not sacrifice is the tangible and the essential 
thing. A recent writer defines cost of production as "the price 
statement of the compensation necessary to the forthcoming of that 
product." This includes: (a) distributive shares; e.g., wages, rent, 
interest, profits; (b) other necessary outlays; e.g., taxes, etc.; (c) 
opportunity cost. (See Davenport: Value and Distribution, 88-93.) 

(i) Constant Cost 

Questions 

1. Define constant cost. 

2. In the following schedules what will the price be, assuming 
cost of production to be the only determinant of supply ? 



4^ OUTLINES OF ECONOMICS 



Units 


Cost per Unit 


Demand Schedule A 


Demand Schedule B 


lOO 


$r 


100 at $4 each 


150 at $3 each 


200 




200 at 3 " 


175 at 2.50 " 


300 




300 at 2 " 


200 at 2 " 


400 




400 at I " 


300 at 1.50 " 


500 




500 at 75c. " 


500 at I " 


600 




600 at soc. " 


700 at 75c. " 


700 




700 at 40c. " 


1,000 at 60c. " 



3. Assume cost of production to be the sole determinant of supply. 
Construct a supply curve to represent the case of goods increasable 
at constant cost, and show that whatever demand curve be drawn 
to intersect it the market price indicated by the intersection will be 
the same. 

4. " No matter what the market fluctuations may be, in the long 
run cost of production will be the significant thing to watch in the 
case of these commodities." Why or why not ? 

5. Do concerns ever sell below cost of production? If so, why? 
Could they continue to do so ? 

6. Does cost of production influence market price ? Does it 
influence normal price ? 

(2) Increasing Cost 

Questions 

I. Assume cost of production to be the sole determinant of supply. 
What will the price be in the following case ? 



Cost Per Unit 


Number Supplied 


Price 


Number Demanded 


$36 


7 


$36 


15 


37 


8 


37 


14 


38 


9 


38 


13 


39 


10 


39 


12 


40 


II 


40 


II 


41 


12 


41 


10 



2. Assume cost of production to be the sole determinant of supply. 
Draw a curve of increasing cost. Draw a demand curve on the same 
diagram. Double your demand. What effect upon price ? 

3. "No matter what the market fluctuations may be, in the long 
run cost of production under the worst circumstances, or marginal 
cost, will be the significant thing to watch in the case of these com- 
modities." Why or why not? 

4. Assume cost of production to be the sole determinant of 
supply. "The marginal cost theory is absurd. Suppose wheat is 
selling for 70 cents a bushel. A farmer whose average cost is 50 
cents will make 20 cents per bushel ' clear velvet ' and wfll therefore 



EXCHANGE 49 

be under strong incentive to increase his output, even though his 
marginal cost be 70 cents. Thus, average cost and not marginal cost 
is the significant thing." Why or why not ? 



(3) Diminishing Cost 

Questions 

1. Define diminishing cost. 

2. Assume cost of production to be the sole determinant of supply. 
''In the case of these goods, value will tend toward the lowest cost, 
in so far as this lowest cost can be realized in the making of all of the 
product demanded. In so far, however, as It is necessary at any time 
to depend for part of the supply on production at a higher cost, the 
case resembles the case of increasing cost, and values tend to adjust 
themselves to the marginal cost, or cost of production under the 
worst circumstances." Why or why not ? 

3. Make a diagram composed of a demand curve and a supply 
curve. Let the supply curve illustrate diminishing costs. 

4. Make a similar diagram in which the demand curve is a wavy 
line and in which the supply curve cuts it at several points. 

5. Show how elasticity or inelasticity of demand determines 
whether production at lower cost shall prevail. 

6. Should you expect the cheapest or the costliest element of 
supply to determine prices 

a) When cheapness results purely from enlarging the output 
of established plants without changes of method or equip- 
ment ? 

b) When cheapness results from a construction and utihzation 
of larger plants ? 

c) When cheapness is the consequence of successive improve- 
ments of machinery and methods, available in small plants 
as well as large ? 

7. At a given time the supply of cotton cloth is derived from 

a) New and up-to-date southern plants; {b) obsolete New 
England plants; (c) progressive New England plants, with 
some old machinery and some new machinery. What 
cost of production will determine the price of the cloth ? 



d) Some of the Forms or Manifestations of Supply 

i. Joint Supply and By-Products 
ii. Composite Supply and the Principle of Substitution 



50 OUTLINES OF ECONOMICS 

i. Jo ml Supply and By-Produds 

Questions 

1. If a pound of porterhouse steak is supplied you, are any other 
goods necessarily put upon the market in the process of supplying you ? 

2. What other articles are necessarily supplied along with mutton, 
flour, cotton, kerosene, lumber, butter ? 

3. Can you determine the actual cost of butter or wool ? 

4. If the price of hides falls, does it follow that men will restrict 
the production of them ? 

5. Would a sudden and large increase in the demand for beef 
affect the supply of hides ? of shoes ? of harness ? 

6. Does this principle apply in the case of the services performed 
by railroads ? 

7. Does it apply to the goods produced by the general farmer ? 

8. Do you think the principle is one of wide application ? Does 
it render easier or more complicated the study of value ? 

ii. Composite Supply and the Principle of Substitution 

Questions 

1. Name some want that can be supplied equally well by two 
different commodities. 

2. Is the principle of substitution of wide application ? Illustrate. 

3. Is there any substitute for physical labor? for mental labor? 

4. If a field is well suited to wheat-growing, and only passably 
good for oats, are there conditions under which it will be devoted to 
oats? 

5. Would the high price of meat affect the consumption of other 
kinds of food? 

6. If the tariff on woolens were removed, would other kinds of cloth- 
ing lose their present market ? 

7. If barley should rise in price would more corn be used than 
formerly ? 

8. If labor in China rose to $1 . 50 a day the demand for capital 
would be likely to increase. Why? 

9. Work out the effects, in the way of substitution, of the exhaus- 
tion of our anthracite coal deposits. 

6. General Questions on Value 

I. In stating the principle that the prices of goods tend to equal 
cost of production some wTiters prefer to say "cost of reproduction." 
Why do you suppose they have this preference ? — T. 



EXCHANGE 51 

2. Suppose commodities x and y are made out of the same 
raw material and cost equal amounts of the same kind of labor. 
Will they have the same prices ? 

3. Has cost of production any part whatever in determining the 
price of strawberries ? 

4. ''If the wheat crop of the world should fall off one-half next year, 
a rise in price would be of great social advantage." Comment. — T. 

5. Look at the daily report on the wheat market in the newspaper. 
Can you see the law of demand and supply working there ? 

6. If hearses were to fall in price would there be an increase in the 
number demanded ? 

7. Even when Raphael was ahve did the value of his pictures 
depend upon the cost of production? Did he possess any natural 
monopoly ? 

8. What does "cost of production" mean when applied to the 
case of a commodity on which practically all the work of design and 
execution has been done by one person ? 

Q. "Value is determined by demand and supply"; "value is 
determined by cost of production " ; " value is determined by marginal 
cost"; "value is determined by cost of reproduction"; "value is 
determined by marginal utility." Can these propositions be recon- 
ciled ? 

10. How is the general statement that (normal) value approxi- 
mates cost of production affected by (a) much fixed capital in the 
industry? {b) Speculative character of the industry? (c) The 
growth of combination or monopoly ? 

11. "It is utterly impossible that silver should long remain at 
55 cents an ounce when three or four of our biggest mines can produce 
it at a cost under 3c cents. Everybody knows price must approxi- 
mate cost of production." Comment. — T. 

12. Do the government reports regarding the prospects for crops 
of wheat, cotton, etc., have any influence upon market prices? 
How? Why do merchants watch these reports more closely than 
reports or estimates of gold production ? 

13. Does a person ever pay a high price for a thing because he 
fears that if he waits for lower prices the supply will all be sold? 
Does this disprove the treatment of the demand schedule? 

14. What do we mean by saying that a good is not produced 
because the cost of production is too high ? 

15. Does not value depend upon the amount of labor expended? 
Is all labor alike? If it were, would a great expenditure of labor 
cause a machine for blowing soap bubbles to have a high value ? 

16. Can you think of anything which has value and yet is not 
scarce? Can you think of anything which is scarce and yet has no 
value ? 



52 OUTLINES OF ECONOMICS 

17. Look at the commodities advertised for sale in the daily 
newspaper. Do the laws of value really explain the way in which 
their prices are fixed ? If not, why not ? 

18. Do the laws of value correctly explain the price of a news- 
paper, a second-hand typewriter, a glass of soda water, a street-car 
fare, a new novel, a ticket to the circus, a suit of clothes, a railroad 
excursion ticket, hats at a fire sale, a ticket to an all-star opera per- 
formance, shoes at a bargain sale, a race horse ? If not, why not ? 

19. "Cement put on the market by a well-equipped mill costs 
about $1.75 per barrel, and it sells at $4. The suppply of raw^ material 
Is practically unlimited and our mill will soon turn out 2,000,000 
barrels per year — and this at a profit of $2.25 per barrel." Has 
anything been overlooked ? — T. 

20. What is the relation of custom and habit to value ? 

21. What is the relation of cost of production to value? 

22. What is the relation of utility to value ? 

23. A trust will sometimes sell its goods below cost in a certain 
locality where there is competition and make up the loss by the high 
price obtained elsewhere. What law would you say determined such 
prices ? 

24. "The output of w^heat will increase 100 per cent and so the 
price will fall 100 per cent." Comment. — T. 

25. If all wages were doubled, what would be the effect upon 
values ? 

26. Can we have an elastic supply ? an inelastic supply ? If so, 
what are the determining factors? 

27. Tell whether the demand for the following is a derived, joint, 
composite, elastic, or inelastic demand: capital; labor; land; shoes; 
wheat; flour; bread; leather; hides; steak; butter; books; pencils; 
wine; playing cards; houses. 

28. Tell of the above whether the supply is joint, composite, 
elastic, or inelastic. 

29. Is the price certain to fall if it is higher than the average cost 
to producers ? If higher than cost to largest producers ?. — T 

30. If there were a combination among all the buyers of a certain 
raw product what would determine the price of that product ? 

31. Is the work of a trader in grain productive ? 

32. Is the board of trade useful to society ? Is the stock market ? 
If so, what services does each perform? 

33. Can brokers fix the price of grain on the market? If so, 
how and to what extent? 

34. Do the storekeepers fix the price of the grain they buy of 
the farmer? 

35. Can it be said that the law of demand and supply fixes the 



EXCHANGE 53 

price of wheat when there is a corner in the market? Does cost of 
production have anything to do with the price at that time ? 

36. Do men speculate because prices fluctuate or do prices fluctu- 
ate because men speculate ? 

37. Mill says that speculators as a class cannot gain by a rise in 
price of their own creating, though individuals may. Do you think 
this is correct ? Does anybody lose, and if so, who ? — T. 

T,S. Explain the prices fixed at an auction sale in terms of demand 
and supply; in terms of marginal utiUty. 

39. X and y are used in making z. How would a reduction in the 
value of X affect the value of y and z ? How would the discovery of a 
cheap substitute for z affect the value of x and y ? 

III. The Mechanism of Exchange 

1. Money Exchange 

2. Credit Exchange 

Thus far we have dealt with markets and the establishment of 
values and prices in the market. In doing so, we have constantly 
been assuming certain media or means of exchange. Since money 
and credit devices are so familiar it was safe so to assume them. 
Our general knowledge enabled us to use them in our reasoning. 

We must now consider in more detail this mechanism w^hich we 
were assuming. 

I. Money Exchange 

a) The Nature and Functions of Money 

b) The Characteristics of a Satisfactory Money Good 

c) The Forms of Money 

d) The Value of Money 

e) Ores ham's Law 

f) The Kinds of Standards 

Money serves as an aid in exchanging goods and in providing a con- 
venient means of expressing their relative values by prices. Credit 
may and commonly does perform money- work, and credit enters into 
price relations as truly as does money. The concrete applications of 
credit are best studied under banking. 

a) The Nature and Functions of Money 

Questions 

1 . Could we have any exchange by using barter alone ? 

2. What is meant by the "double coincidence" of barter? 



54 OUTLINES OF ECONOMICS 

3. Could the exchange system be as complex as it is today if we 
depended upon barter alone? Would the productive process be 
as efficient? 

4. Can you cite any cases of barter being used today ? 

5. What difficulties of a system of barter are overcome by the 
use of money ? 

6. What is money? Must money have value? Has gold coin 
value because it is money or is it money because it has value ? 

7. It has been said that the functions of money are to serve as (a) 
a medium of exchange; (6) a standard (common denominator of 
value); (c) a standard for deferred payments. Explain why each 
of these functions is useful and cite cases w^here money performs each 
of these functions. 

8. A buys 1,000 bushels of wheat from B at $1 a bushel. B 
accepts in payment a note for $1,000, payable with interest two years 
from date. Two years later A pays B the $1 ,000 with interest agreed. 
Which of the functions does money perform in the course of these 
transactions ? 

9. If half the money in a country w^ere suddenly to disappear, 
would the wealth of the country be diminished ? 

10. Would it be possible to have a standard of value which did 
not serve as a medium of exchange ? a medium of exchange which did 
not serve as a standard of value? Can you find examples in the 
circulation of this country ? 

b) The Characteristics of a Satisfactory Money Good 

Questions 

1. Name five commodities formerly used as money and explain 
why they were abandoned for that purpose. 

2. Would the following make good nioney: iron, w^heat, diamonds, 
glass beads, sea shells, beaver skins ? If not, why not ? 

3. Are there any of the functions of money which would not be 
satisfactorily performed by the commodities mentioned in the pre- 
ceding question? 

4. Are there any respects in which gold is superior as money to the 
above-mentioned commodities? If so, explain the superiority in 
each case. 

5. Reasoning from your answers to the above questions, what 
would you conclude are the characteristics of a good money ? Take 
up in turn the functions of money and state which of the character- 
istics of a satisfactory money good apply to each function. 

6. Are there any respects in which gold or silver fall short of 
these desired characteristics ? 



EXCHANGE 



55 



7. What is meant by having a sufficient quantity of the circulating 
medium ? 

8. Is a low price level unfortunate provided it is stable? Is a 
high price level absolutely high or high by comparison? If "high 
price level" is wise, how high? Why stop there? 

9. If a change in the value of money affects all prices alike, is 
anybody injured thereby ? 

10. What classes are affected by a rise in the value of the standard ? 
a fall in the value? 

11. It has been argued that a steadily faUing standard tends to 
stimulate business. Why? Do you think such a standard would 
be desirable ? 

12. It was said that the uncertainty about the standard in this 
country about 1893 helped to cause the panic. Is this a probable 
statement ? Did this uncertainty affect the value of securities ? 

13. Some people are urging the coining of the one-half cent 
piece. Why ? 

14. Why do we have $1,000 bills in our currency system ? 

15. "It is crop-moving time. Since farmers do not use checks 
very much we should have more money for a while." What does this 
mean ? Why more money " for a while " ? 

6") The Forms of Money 

i. Standard Money 
ii. Token and Subsidiary Currency 
iii. Credit Money 

Questions 

1. What would you understand the expression "standard metal" 
to mean ? 

2. Would it sometimes be more convenient to have an order for 
a bushel of wheat than the wheat itself ? Answer the same question 
for a bag of 10,000 gold coins. 

3. "Token money is necessary in order to have money in denomi- 
nations convenient for exchange transactions of all possible sizes." 
Why or why not? 

4. A bank can have outstanding current obligations to the extent 
of four or more times its cash on hand. How does it dare to do this ? 

5. What are subsidiary coins? Are they legal tender? Define 
legal tender. 

6. The United States government keeps a gold reserve of 150 
millions against 346 millions of greenbacks. How does it dare to 
keep less than 100 per cent reserve ? 



56 OUTLINES OF ECONOMICS 

7. What is meant by likening credit money to a "road through 
air" that permits society to use for other purposes the ground formerly 
used for the road ? Are roads through air safe today ? 

8. Cite instances of standard, token, subsidiary, and credit money 
in the currency system of the United States today. 

9. Why are copper and nickel used for coins ? 

10. Why does not the government use pure gold and silver in its 
gold and silver coins ? 

11. Why not issue perfectly plain cubes for coins? Why mill 
the edges of coins? 

12. In the days of the California gold discoveries different indi- 
viduals and firms coined their own gold-pieces. Is there any reason 
for prohibiting such a practice and confining coinage to the govern- 
ment ? 

13. What is seigniorage? brassage? 

14. Copy from each of the kinds of paper money in use in the 
United States today the significant statements printed thereon. 

d) The Value of Money 

i. The Value of Standard Money 
ii. The Value of Other Forms of Money 



i. The Value of Standard Money 

The value of standard money, so long as there is free and unlimited 
coinage, depends upon the value of the money-metal used in the 
coin. The value of the money-metal is determined in the same way 
as the value of any commodity — by demand and supply. 

Careful attention should be paid to the factors which affect the 
demand for the money metal. The demand arises from two sources: 
{a) the demand for use in the arts, {b) the demand for use as money. 
Obviously the latter demand is less than it would be otherwise if 
various forms of credit are^used to help perform the work done by 
the standard, or if the conditions are such that money circulates 
rapidly so that a given piece does so much the more work. 

The business man in speaking of the value of money usually has 
in mind the current rate of interest which can be obtained for money 
which is loaned. This should not be confused with the meaning of 
the term as it is used by the economist — i.e., the power of money in 
exchange. Since this is measured by the amount of every other 
commodity for which money will exchange, the value of money is 
commonly indicated by the general level of prices. 



I 



EXCHANGE 57 

Questions 

1. The demand for wheat is a joint demand. Would it not be 
incorrect to say its value depended upon the demand and supply for 
some one use? How as to gold? 

2 . What is meant by the demand for money ? 

3. If Europe ceased to use gold for money would that action affect 
the value of American gold coins ? If so, how and when ? 

4. If dentists discovered a cheap fiUing for teeth which was better 
than gold would it tend to alter the value of the gold eagle ? 

5. The introduction of the cyanide process for extraction of gold 
so decreased the cost of production that refuse heaps of old mines 
were worked over again. What effects would you expect this to have 
upon the use of gold in the arts ? upon its use as money ? What would 
be the effect upon its value in the arts ? upon its value as money ? 

6. A certain amount of gold can be extracted from sea water, 
yet this extraction is not generally attempted. Why not? Are 
there any conditions under which this might be resorted to ? 

7. Can five ounces of gold set aside for use in the arts have a 
different value from the same amount of gold in a coin ? If so, why ? 
If not, why not? 

8. Would a seigniorage tend to affect the value of money, and 
if so, how ? 

Q. Is the value of the dollar fixed and stable ? 

10. Suppose you could have a commodity which everybody would 
willingly accept as money and which had no other use. Suppose, 
further, that all exchanges must be performed by this form of money. 
Would not its value depend upon demand and supply for that one 
use? If there were such a paper money and there were no other 
money, would not its value depend largely upon arbitrary regulation 
of its supply by the government ? Is such a case likely to occur ? 

11. Does the value of the gold depend upon its marginal cost 
of production ? Is there a large stock today ? Is the industry 
speculative? Is this a case where indirect cost forms a large part 
of total cost? Have these latter questions any bearing upon the 
relation of the value of a $5 gold piece to its marginal cost of produc- 
tion ? 

ii. The Value of Other Forms of Money 

Questions 

1. What must be done to keep token, subsidiary, and credit 
money equal in value to the standard ? 

2. The value of gold fell. Effect upon the value of the $5 gold 



58 OUTLINES OF ECONOMICS 

piece? Upon the price of the $5 gold piece? Upon the value of 
wheat ? Upon the price of wheat ? Upon the value of the cent piece ? 
Upon the value of the dime ? Upon the value of an ounce of silver ? 
Upon the value of the silver dollar ? 

3. What determines the value of the silver certificate ? of the green- 
back ? of the national bank note ? 

4. Is there any difference between the value of the bullion in a 
silver dollar and the value of a silver dollar? If so, how can you 
explain it? 

5. During the Civil War the value of the greenback fluctuated 
continually. For example, after a union victory, the greenback rose 
in value. Why ? 

e) Gresham's Law 

Questions 

1. Suppose a man borrowed a bushel of wheat of you. Let the 
government now pass a law stating that debtors may pay back 
borrowed wheat in grain of either good or poor quality. In what 
quality do you think you will be paid ? 

2. If you were to get some gold bullion by melting coins, would 
you melt full-weight or light-weight coins? Suppose you were 
desiring to ship gold out in international payments, which kind 
of coin would you ship ? 

3. If in bullion form one ounce of gold equals in value 32 ounces 
of silver, and by a legal tender law it is provided that the coins 
made from i ounce of gold shall exchange for the coins made from 16 
ounces of silver, would you take gold to the mint to be coined? 
Would you take silver to the mint ? 

4. Suppose a country is on a gold standard. War is declared. 
The government concludes to issue paper money which it declares 
shall be legal tender and which it promises to redeem after the war 
is over. Doubts arise as to whether it will ever be redeemed. If 
someone owed you, would he pay you in paper or in gold ? Why ? 
Would you have any option in the matter ? Would gold remain in 
circulation ? 

5. State Gresham's Law, and give an illustration from the mone- 
tary history of the United States of a case where it operated. 

6. Is there any reason why the proportion of pure metal in the 
subsidiary coins should be considerably lower than the proportion 
in the standard coin ? 



f) The Kinds of Standards 

i. The Single Standard 
ii. The Double Standard 



j 



EXCHANGE 59 

iii. The Limping Standard 

iv. The Tabular Standard 
V. The Paper Standard 

Several possibilities exist with reference to the form or kind of 
standard a country should have. In attempting to decide this ques- 
tion the main point at issue is that of the stability of the standard. 

i. The Single Standard (monometallism) 

Questions 

1. Why is gold more stable in value than most commodities? 

2. Will the recent adoption of the gold standard by a number of 
countries tend to make the value of gold more stable, for the time 
being ? in the long run ? 

3. Has the production of gold been quite regular, or have there 
been great changes in the output ? What is the situation at the pres- 
ent time ? 

4. Has the United States ever been on a single standard ? If so, 
when ? 

5. Suppose a country has a gold standard. Will that mean that 
it may not have silver or copper coins ? May it have credit money ? 

ii. The Double Standard (bimetallism) 

Questions 

1 . What is meant by bimetallism ? Have we ever had a bimetallic 
standard in the United States ? If so, when ? 

2. What is meant by 16 to i ? Has that ratio ever been adopted 
in the United States, and if so, when ? Has there ever been any other 
coinage ratio in this country ? 

3. On what ground can the bimetallist contend that bimetaUism 
will give a more stable standard of deferred payments ? 

4. "The coinage ratio sets in motion forces of demand and supply 
that will cause the market ratio to coincide with the coining ratio. 
If silver tends to fall in the market, then it will tend to rush to the 
mint. Thus the demand for silver is increased and by its displacing 
gold in the currency the demand for gold is lessened." Explain. 

5. If the above be true would bimetallism be more Ukely to succeed 
if the coining ratio chosen be near the existing market ratio ? Why ? 

6. Would bimetallism be more likely to succeed in a country which 
used much metal in its currency ? Why ? 

7. Precisely why would international bimetallism be stronger 
than national bimetallism? 



6o OUTLINES OF ECONOMICS 

8. In Question 4 above, if silver displaced all the gold in circula- 
tion, would there then be bimetaUism in fact? 

9. "Bimetallism is absurd. It would result first in gold mono- 
metaUism, then in silver monometaUism, and so on." What does 
this mean ? 

10. Is the demand for gold and silver homogeneous — i.e., is it an 
interchangeable demand ? Are the conditions of supply homogeneous ? 

11. Is Gresham's Law likely to come into operation under a 
bimetallic standard? If so, under what circumstances? 

12. At the time of Bryan's free-silver campaign some favored a 
coinage ratio of 32 to i instead of 16 to i. What was the reason for 
this ? If you had had to decide between the two, which ratio would 
you have chosen ? 

13. In 1856 France had bimetallism with a coinage ratio of 15.5 
to I. The market ratio was about 15.3 to i. Which metal w^as the 
cheaper or overvalued metal? — T. 

14. If the United States were now to adopt bimetaUism at the 
ratio of 16 to i what changes would take place in the circulating 
medium of the country? 

15. If the United States had free coinage at 16 to i and the market 
ratio of gold and silver were 12 to i, what would be the effect on the 
circulating medium of the country? 

16. Does the principle of substitution of goods have any bearing 
on the value of metals under bimetallism ? 

17. Is there anything in the nature of mim.ng that keeps the ratio 
of the supply of gold and silver nearly uniform ? What light does 
the history of the output of these metals during the nineteenth 
century throw on this point ? 

18. Is a bimetallic standard likely to be more stable than a mono- 
metalHc standard ? 

19. Would the adoption of bimetallism by all civilized countries 
(international bimetallism) result in a more stable standard than its 
adoption by the United States alone ? 

20. Is there more or less reason for the adoption of bimetallism 
by the United States now than there was about 1893 ? 

21. Draw up a chronology of the monetary history of this country. 

22. We had bimetallism from 1792 to 1873. Yet far more silver 
dollars were coined from 1878 to 1893 than w^ere coined in the earlier 
period. Explain. 

23. From 1792 to 1834 our coining ratio was 15 to i and the market 
ratio was nearer 15.5 to i. What metal tended to go to the mint? 
Why were no silver dollars coined from 1805 to 1836 ? 

24. From 1834 to i860 our coining ratio was 16 to i and the market 
ratio was nearer 15.5 to i. What metal tended to go to the mint ? 



EXCHANGE 6i 

25. It has been said that the legislation of 1873 deprived people 
of ''the dollar of their daddies." Establish that people living in 
1873 had had little opportunity ever to have seen a silver dollar. 

26. What was the "crime of 1873" ? Why did the measure pass 
Congress with so little opposition at the time ? 

27. What was the specific demand of the free-silver party ? When 
did the free-silver movement arise? Why did it come when it did 
instead of earlier — say about 1855? 

28. What different classes or sections of the country wanted free 
silver ? What did they expect to gain by it ? 

29. What legislation was passed as a result of the demands of the 
free silverites ? What were the consequences of that legislation ? 

iii. The Limping Standard 

This topic requires no discussion. The term is used to express 
the situation in those countries where both metals have unUmited 
legal tender power but where only one is coined unlimitedly. It 
marks a transition from the double to the single standard. France 
and the United States furnish examples of a limping standard. 

iv. The Tabular Standard 

A change in the value of money and a change in the level of 
prices are but tw^o ways of stating the same fact — the change in the 
exchange ratios between money and goods. The fact of the change 
implies nothing as to the cause of the change. The cause may be 
exclusively on the gold side, or exclusively on the side of the other 
goods, or it may be a cause w^hich affects both sides. 

A change in the level of prices (from whatever cause) has serious 
consequences. The tabular standard is a device for studying these 
changes and for minimizing the consequences of these changes, if it is 
actually used. 

Index numbers are the ratio of the general average of prices at one 
time to the general average (usually expressed as 100) at some previous 
period which has been chosen for purposes of comparison. 

Questions 

1. Construct an index number based on assumed prices for a 
dozen commodities at tw^o different periods, showing the change in 
the value of money. 

2. Why is "weighting" sometimes used in the construction of 
index numbers ? Is the correction important ? 

3. In the nineties the gold party declared that the value of silver 
had fallen in the preceding twTnty-five years; the silver party 



62 OUTLINES OF ECONOMICS 

declared on the other hand that it was not a fah in silver which had 
taken place, but a rise in gold. How would you go. about it to find 
out the truth of the matter ? 

4. Enumerate some of the things which might tend to raise or 
lower the prices of a large number of commodities independent of any 
change on the part of the standard. 

5. Explain the tabular standard. Do you think it would be 
better than a gold standard ? 

6. Why do business men object to this idea of the tabular 
standard ? 

V. The Paper Standard (fiat money) 

Questions 

1. Is it hypothetically possible that a mere paper standard could 
be more stable in value than the gold standard? (This question 
assumes that people would be wiUing to accept a paper standard.) 

2. Is it true that if we used paper money instead of gold much 
social outlay would be saved? 

3. Why not have a paper standard ? 

4. Why have some people desired it? 

5. It is commonly said that from 1862 to 1879 the United States 
was on a paper standard. Does this refer to the legal or to the 
actual situation? Even with reference to the actual situation, were 
people accepting the paper money because the government ordered 
it or because they expected it to be redeemed in gold at some time ? 

6. Has there ever been a case of a pure paper standard? Is 
such a thing likely to exist save in the sense of a tabular standard ? 

g) International Flow of Money (treated under Foreign Exchange) 

2. Credit Exchange 

a) Credit and Credit Instruments 

h) Credit Institutions (with particular reference to banking) 
By far the greater part of the exchange transactions in such an 
industrial society as that of the United States is performed by credit 
devices. Some analysis of these devices and the way in which they 
operate is necessary. 

a) Credit and Credit Instruments 

Questions 

1. Define credit. 

2. What is meant by book credits? checks? promissory notes? 
drafts? bills of exchange? 



EXCHANGE 63 

3. Show how each of these credit devices may perform money 
functions. 

4. Is credit capital ? Does it really add to the sum total of instru- 
ments, or does it merely make possible a better utilization of instru- 
ments already existing ? 

5. "Credit quickens the productive process." Do you agree? 
If so, how does it do so? 

b) Credit Institutions (with particular reference to banking) 

i. Principles of Banking 

ii. Clearing-House Operations 
iii. Comparison of Banking Systems 
iv. Foreign Exchange (treated under International Trade) 



i. Principles of Banking 

Questions 

1. State carefully what is meant by {a) discount, (b) deposit, (c) 
issue. 

2. What forms of so-called banking can you enumerate? Which 
of these forms of banking do you regard as banking in the strict 
and typical sense? 

3. Which of the three fundamental banking functions are per- 
formed by {a) savings banks, {b) trust companies, {c) ''bankers," 
in the sense of dealers in foreign exchange ? 

4. On what sorts of security do banks ordinarily make loans ? 

5. What are the relative advantages and disadvantages of checks 
and banknotes as regards {a) convenience, {b) safety? 

6. Why should any more care be taken by the government to 
protect banknotes than to protect deposits ? 

7. What are the most desirable forms of investment for a bank? 

8. How can a bank fail when its assets are greater than its current 
liabilities ? 

9. "One of the main functions of a bank is to place capital with 
those who can use it best. This aids society as well as the individual." 
Do you agree ? 

10. In what ways may a deposit account be created ? 

11. "A bank wishes a strong reserve." "A bank wishes as small 
a reserve as possible. A reserve is idle money." Can these state- 
ments be reconciled ? 

12. "The government could justly tax bank issues 5 or 6 per cent. 
In the United States banks buy bonds and collect the interest on 
these bonds. They issue notes on the basis of these bonds and get 



64 OUTLINES OF ECONOMICS 

interest on the notes also. Thus they make a double profit and so 
are favored over other businesses." Do you agree ? 

13." A bank should be free to give the community it serves the 
kind of service desired. If deposit currency is desired, let the bank 
have freedom in giving that service. Let the same be true of cir- 
culation." What is meant by deposit currency? by circulation? 
Do you agree with the quotation ? 

14. '' An effective redemption scheme is all that is needed to secure 
either notes or deposits." Do you agree ? 

15. On which side of a bank statement should the following items 
go? Show why in each case: overdraft, expenses, unpaid dividends, 
certified checks outstanding. 

16. Bank X has the following items in its account: 

Loans and discounts $380,000 Capital $100,000 

Bonds and stocks 21,000 Surplus 20,000 

Real estate 12,000 Undivided profits 8,000 

Notes 50,000 Due from banks 40,000 

Deposits 350,000 Cash 60,000 

Other assets 15,000 

A) Arrange these items as they should stand in a regular state- 
ment. 

B) Taking this statement as a basis, account for the following 
transactions: 

a) The bank discounts $50,000 of commercial paper for 3 months 
at 4 per cent per annum, making half the advance in cash and half m 
deposits. 

b) $70,000 of loans are paid up at maturity. $10,000 of th's 
payment is made in cash; $15,000 in the notes of this bank; and the 
remainder in checks drawn upon this bank. 

c) A dividend of 2 per cent is declared, of which J is credited to 
depositors and | paid in cash. 

d) The real estate increases in value by $3,000. 

e) $5,000 is added to surplus. 

Balance the completed account. What is now the proportion 
of reserve to demand liabilities ? What was the proportion originally? 

17. Taking as basis the statement at the beginning of the previous 
question, account for the following transactions: 

a) The bank cashes checks on other banks to the amount of $2,500 
and for the time being holds the checks before collecting them. 

b) New deposit accounts are created to the extent of $10,000 
by the deposit of checks on other banks. 

c) $5,000 of loans prove bad and are not paid at maturity, but 
the bank partially escapes loss by taking $4,000 worth of bonds 
and stocks which it held as collateral for the loans. 



EXCHANGE 65 

d) The bank sells for cash at face value a draft for $1,000, drawn 
by it against another bank with which it carries a deposit account. 

Balance the completed account. What is the proportion of 
reserve to demand liabiUties? 



ii. Clearing-House Operations 

Questions 

1. When the butcher and the baker cancel from their books equal 
accounts against each other, is this in the nature of a clearing trans- 
action? 

2. When you deposit checks in your bank and draw others in favor 
of your creditors, does the bank actually move money about? If 
all the parties interested dealt with the same bank, would that bank 
serve as a sort of clearing-house for these individuals? 

3. What is the immediate function of a clearing-house? What 
are some of the indirect advantages ? 

4. Distinguish between clearing-house certificates and clearing- 
house loan certificates. 

5. Are clearing-houses more important for checks than for notes? 
Why? Can you give instances of the practice of redeeming bank 
notes through a clearing-house? 

6. Why is the expedient of combined reserves resorted to ? What 
is the fundamental advantage of the expedient? Would it be 
advantageous to combine the reserves of New York banks regularly 
and permanently ? 

7. "Combined reserves strengthen banks in their dealings with 
each other, i.e., through the clearing-house. EquaHzed reserves aid 
banks in their drains over the counter." What does this mean? 
Is it true ? 

8. Why in the United States do we trouble about combined 
reserves? Is there really less money in the country in time of 
panic ? 

9. How^ does the issue of clearing-house loan certificates affect the 
power of banks to lend? Are they profitable to the banks? Do 
they stay out long ? 

10. Are weekly reports of clearings any true indication of the 
prosperity of business in general ? Explain. 

1 1 . Are stock transactions in Wall Street (and elsewhere) included 
in clearings ? 

12. Do all checks pass through the clearing-house? 

13. How do banks not members of clearing-house associations 
manage their exchanges ? 



66 OUTLINES OF ECONOMICS 

iii. Comparison of Banking Systems 

Questions 

I. Draw up a comparative statement in the form indicated below 
to show the regulations and poUcies of the Bank of France, the Bank 
of England, the Reichsbank, and the national banks of the United 
States. 



1 

1 Bank of 
France 


Bank of 
England 


Reichs- 
bank 


National 
Banks of 
the U. S. 


Date of establishment and reasons for es- 
tablishment 








Ownership 








Management 1 








Financial relations with government 










Capital* 










Surp 


)lus* 
















Extent of monopoly of issue . . ... 














1 




Nature of the limitation of the amount 
of issue 












Provisions for security 










z 






Elasticity .... .... 
















Legal tender powers 
















Proportion to liabilities 










u 




> 


Composition 














oi 


Polity of maintenance in crisis 











*In giving figures for capital, etc., give amounts in the currency of the respective coun- 
tries, with the equivalent sum in dollars in parentheses. 

2. What provisions of law, peculiar to the United States national 
banking system, interfere with the reasonable extension of bank credit 
(including deposits and notes) in time of financial stringency ? 

3. What has been the effect of suspending the act of 1844 during 
periods of embarrassment for the Bank of England ? Would experi- 



EXCHANGE 67 

ence suggest the repeal of the act, to give the bank greater freedom 
at all times ? 

4. Why is a large reserve maintained (a) by the Bank of France ? 
(b) by the Bank of England? 

5. Explain in detail whether or not the following statement would 
represent a proper condition of the n-ih National Bank of Pittsburgh: 

Capital $150,000 Loans $500,000 

Surplus 25,000 U.S. bonds 55,ooo 

Undivided profits 5,ooo Other bonds and stocks 125,000 

Deposits 600,000 Real estate 90,000 

Notes 160,000 Other assets 25,000 

Due from banks 80,000 

Deposited with U.S. treasurer 9,000 

Specie and legal tender 5 5, 000 

6. Rank the national banks of the United States, the Bank of 
England, the Bank of France, and the Reichsbank in the order of 
(a) security of notes; (b) elasticity of note-issue; (c) elasticity of 
banking credit in general; {d) reserve against deposits; (e) propor- 
tion of deposits to notes; (/") closeness of governmental control or 
supervision. 

7. Why is an elastic currency desirable ? What parts of the means 
of payment of this country are elastic ? 

8. State the provisions of the Aldrich-Vreeland Act and explain 
their purpose. 

Q. Why do they not resort to combined reserves in England or 
Germany in time of panic as in this country ? 

10. Do the reasons which make a speedy redemption of bank notes 
desirable apply in the United States today ? 

11. Give the arguments for and against state guarantee of bank 
deposits. 

12. Give the arguments for and against a central bank of issue 
jn the United States today. 

iv. Foreign Exchange (treated under International Trade) 

IV. International Trade 

1. The Principles Determining International Trade 

2. The Balance of Trade Idea 

3. Foreign Exchange 

4. Regulation of International Trade (w^th particular reference to 
the protective tariff) 

International trade does not differ essentially from domestic 
trade. The motives leading to trade between inhabitants of the 



68 OUTLINES OF ECONOMICS 

United States and inhabitants of England are not different from the 
motives leading to trade between inhabitants of Illinois and inhabi- 
tants of California. It has become customary, however, to give 
separate treatment to international trade, largely because such 
trade is almost everywhere the subject of special regulation by 
government. 



I. The Principles Determining International Trade 

a) Trade Based upon Insuperable Differences (e.g., trade between 
tropical and temperate regions) 

b) Trade Based upon Differences Constituting Reciprocal Superiority 
(one region being superior in one line, the other region being 
superior in a different line, e.g., American export of cotton to 
Mexico) 

c) Trade Based upon Differences Constituting Relative Superiority 
(e.g., American wheat in exchange for British steel) 

Given two regions where in each case the one is able, through 
natural endowment or character of population, to produce goods 
which the other cannot, it is natural that trade should arise. It is 
not difficult to see, furthermore, that given two regions where one 
has a superiority (though not a monopolistic superiority) in one 
commodity while the other region has a superiority (though again 
not a monopolistic superiority) in another commodity, trade is again 
a natural result. The third case is somewhat more puzzling. Given 
two regions, one of which is superior to the other in both lines of 
production, trade may arise provided the superior region is relatively 
stronger (compared with the inferior region) in one line of production 
than it is in the other line. 

Note: — In every country natural advantages in production are 
reflected in the rates of wages and interest. In a country of superior 
advantages, the rates of wages and interest are likely to be high. 
Thus in the United States, the natural endowment of which is espe- 
cially rich, wages are higher than in any other country; interest rates 
are also higher than in Western Europe. It follows that in industries 
requiring a relatively great expenditure of labor and an extensive 
capital equipment, as in many branches of manufacture, money 
costs of production are likely to be higher in the United States than in 
Europe, in spite of the fact that American workmen are often more 
efficient than European, and American capital frequently takes the 
form of better equipment than that of European countries. The 
money cost of production in the United States is Ukely to be relatively 
low in the industries that make a large drain upon natural resources 



EXCHANGE 69 

and require comparatively little use of labor and capital, as in many of 
the extractive industries. 

With the steady increase in population and capital, the United 
States gradually overcomes the disadvantages that lie in the way 
of successful manufacture. Owing to the operation of the law of 
diminishing returns it loses gradually its advantages in extractive 
industries. Accordingly, even without interference on the part of 
the government, the United States would become more and more of 
a manufacturing nation and become less and less engaged in extrac- 
tive industries. 

Questions 

1. A is a good musician but temperamentally unfitted for other 
work. B, while fond of music, is efficient only in farming. Is an 
exchange likely to take place? Would the situation be different if 
A and B represented regions of different natural endowment ? 

2. A by one day's labor can make nine units of .v or two units oiy. 
B by one day's labor can make two units of x or nine units of y. Would 
specialization and exchange be likely to take place ? Would the situa- 
tion be different if A and B represented regions instead of men ? 

3. A by one day's labor can make 20 units of x or 10 units of y. 
B by one day's labor can make 15 units of .r or 5 units of y. Would 
specialization and exchange be likely to take place ? Would the 
situation be different if A and B represented regions instead of men ? 

4. A is a very able lawyer and also a very skilful stenographer. 
Is it surprising that he confines himself to the law and hires a stenog- 
rapher who is much less skilful ? 

5. In the eight months ending August i, 1909, the export and 
import trade of the United States with Europe amounted to $1,323,- 
000,000; the export and import trade wdth South America amounted 
to $166,000,000. Do you believe that the relative volume of the 
tw^o branches of our foreign trade will be the same fifty years from 
now ? Why ? 

6. Every important commercial nation has, in the last two decades, 
endeavored to establish control over some portion of the tropics. 
Explain this fact on the basis of the conditions underlying international 
trade. 

7. When China becomes modernized can the United States expect 
to export large quantities of manufactures to that country? Of 
agricultural products ? 

8. If Canada w^ere annexed to the United States, would the 
character of the trade between the two regions be changed ? 

9. State the economic conditions that serve as a basis for the 
trade between the United States and Mexico. 



70 OUTLINES OF ECONOMICS 

10. An American statesman of the nineteenth century declared 
that it was bad policy for the United States to import any commodity 
that could be produced in the United States. Do you agree ? 

11. Another statesman urged that no commodity which can be 
produced in the United States with the same amount of labor as in 
foreign countries could be economically imported. Do you think 
this position tenable ? 

12. It has been asserted that the income of the citizens of the 
United States could be greatly augmented if all commodities now 
imported were produced at home, and all commodities now exported 
were consumed at home. The cost of transportation, now amount- 
ing to several hundred miUions annually, would thus be saved. Apply 
this argument to trade between the Middle West and the Pacific 
slope, and expose the fallacies involved in it. 

13. From your knowledge of the development of wants under 
modern conditions, would you argue that international trade will 
tend to increase or to diminish in the future ? 

14. Canada and England can each produce both hardware and 
wheat. But England has a body of workmen specially trained for 
the production of hardware, while Canada has vast fertile territories 
wonderfully adapted for the growing of wheat. From these facts 
it naturally follows that Canadians and British gain mutually through 
an exchange of products. Do you agree ? 

15. Is international trade Hkely to be permanent if based upon 
(a) differences of climate and other natural conditions ? (b) differences 
in relative supply of land ? (c) differences in relative supply of capital ? 
(d) differences in character of population ? Tell why you answer as 
you do in each case. 



2. The Balance of Trade Idea 

The doctrine of the balance of trade, although it is of relatively 
little significance in the economic science of the present day, has 
historically been important. It merits discussion at this point 
chiefly because of its lingering influence upon uncritical pubUc opinion 
and because of its relation to the subject of the international exchanges. 

Questions 

1. What is meant by an unfavorable balance of trade ? 

2. What items have to be taken into account in determining the 
balance of trade ? 

3. Does the term balance of trade refer to a balance between one 
nation and another nation or between one nation and the world ? 



EXCHANGE 71 

4. The United States imports heavily from South America but 
exports very little to that continent. Is there any way in which the 
resulting indebtedness can be settled without a transfer^of money? 
If so, explain how. 

5. How did the American colonies pay for their imports of British 
manufactures ? 

6. It is argued that imports of foreign goods may result in the 
necessity of exporting money to pay for them, and that therefore, 
where such is the case, such imports should be stopped. Do you 
agree ? 

7. In the seventeenth century many nations tried to regulate 
trade so as to bring money into the country and keep it from going 
out. Was their plan a wise one ? 

8. Could a country continue to export gold for a long period of 
time ? If not, why not ? If so, under what conditions ? 

9. The value of British imports is nearly $1,000,000,000 in excess 
of the value of British exports and an excess of imports has continued 
for many years. How can you explain this ? 

10. Summarize the history of the balance of trade of the United 
States, distinguishing periods during which the balance was favorable 
or unfavorable, and mentioning the causes to which these favorable 
or unfavorable balances were due. 



3. Foreign Exchange and International Payments 

1. Make a list of the causes which may lead to a flow of money 
from one country to another? 

2. Explain the steps in the mechanism of foreign exchange by 
which a Chicago importer can pay a debt which he owes in London. 

3. What is the par of exchange ? How is it determined ? 

4. What are the gold points ? Why does not exchange normally 
rise above the upper gold point or fall below the lower gold point ? 

5. ''The nations of the world should adopt a uniform system of 
currency with a common standard. This would do away with all 
this bother with ' par of exchange,' 'gold points,' 'rate of exchange,' 
etc." Why or why not? 

6. What persons deal in foreign exchange ? 

7. "The rate of exchange is simply another case of the applica- 
tion of the principle of demand and supply. Given two trading 
regions, if the payments due each other are equal, exchange will be 
at par. If an unequal balance exists, demand will exceed supply 
and the rate of exchange will move away from parity." Take 
two regions, assume certain trading operations, and demonstrate the 
quotation by actual arithmetic. 



72 OUTLINES OF ECONOMICS 

8. Is the rate of exchange on London Ukely to fall below par at 
one period of the year and rise above par at another? If so, when 
and why ? 

9. If a Chicago merchant imports coffee from Brazil, and nobody 
in Brazil imports goods from the United States, how could the debt 
be paid without the shipment of money? 

10. "International payments are made by credit instruments as 
long as they last. Gold flows only as a last resort." Explain. 

11. If there should be a failure of the cotton crop next year, would 
there be any effect upon international exchange ? 

12. Would a rise in the rate of interest in New York tend to affect 
the international flow of gold? Would it tend to affect the rate of 
exchange on London ? 

13. How would the opening of rich gold mines in the United States 
tend to affect the rates of foreign exchange ? 

14. Would a rise in prices such as took place during the Civfl 
War increase imports? 

15. How is a country like England, which has no gold mines, 
suppHed with gold? 

16. Can gold have a lower value in England than in the United 
States ? 

17. Would the discovery of, a rich field of gold in the United 
States increase or diminish the real wealth o" England ? 

18. How does it concern the people of the United States whether 
or not a foreign country adopts the gold standard ? 

19. Would you expect gold to have a lower value in Alaska 
than in England ? How great could such a difference in value be ? 



4. Regulation of International Trade (with particular reference 
to the protective tariff) 

Questions 

1. What is the distinction between a protective tariff and a 
tariff for revenue only ? 

2. Why do we not have export duties in the United States? 

* 3. What is the infant-industry argument? Is it economicafly 
sound in your opinion ? Does it apply to the conditions in the United 
States today? 

4. At one time it was argued that because wages were high in 
this country a tariff was necessary to protect the manufacturers 
against European products made by cheaper labor. At a later period 
it was argued that w^ages were high because of the tariff, therefore 



EXCHANGE 73 

the tariff should be continued in order to keep up the high level of 
wages. Can these statements be reconciled ? Are they correct ? 

5. Can one use the infant-industry argument and at the same 
time argue for a permanent tariff to protect labor without inconsist- 
ency? 

6. It is argued that the protective tariff by making it profitable 
to carry on an industry increases the output and engenders a compe- 
tition which ultimately lowers prices. Would you agree ? How does 
this argument agree with the argument that a permanent tariff is 
needed ? 

7. It was once thought by some that if one person gained in trade 
the other lost. Would you agree ? Would such a theory hold true 
as regards trade between nations? 

8. Assuming it to be constitutional, would it be wise for the state 
of Illinois to levy tariff duties on goods brought in from other 
states ? 

9. If the duty on oranges were sufficiently high it might be possible 
to develop the orange-growing industry in Illinois. Would it not 
be wise to do so ? 

10. We have had protection and the country has prospered greatly; 
therefore protection should be continued. Do you agree ? 

11. Grant that the country has prospered more than it would 
have prospered without the protective tariff. Does that estabHsh 
that we should have had a protective tariff? Might it not have 
prospered more with some other system of aid to industry ^^ 

12. "The protective tariff not only protects American industry; 
it also forces the European producer to pay for most of the expenses 
of running our government." Do you agree? 

13. ''Everything we buy abroad diminishes by so much the 
demand for American labor." Do you agree ? 

14. When did the United States adopt a policy of high protective 
duties and what were the reasons put forward at the time ? 

15. Why was the South in favor of free trade? 

16. Has the attitude of New England toward protection ever 
varied ? If so, when and why ? 

17. What are the reasons for the growing demand for a reduction 
of the tariff ? 

18. Explain the attitude of the different sections of the country 
toward the tariff at the present time. 

iQ. What arguments can be advanced in favor of continuing the 
policy of protection at the present time ? 

20. How would the adoption of free trade affect the American 
laborer? Which w^ould better protect American labor, high tariff 
duties or laws restricting immigration ? 



74 OUTLINES OF ECONOMICS 

21. Would it be more economical to aid American industries by 
giving them a bounty equal to the protective duty instead of that 
duty? 

22. Who really determines whether an industry shall be protected ? 
Who determines what amount of protection shall be given ? Is the 
method a scientific one ? 



» 



I 



I 



E. THE DISTRIBUTIVE PROCESS 

I. Introductory 

II. Rent 

III. Wages and Trade Unionism 

IV. Interest 
V. Profits 



I. Introductory 

We have to do here with the sharing among the members of society 
of the economic goods produced — of the social dividend. How do 
men secure shares of this social dividend? What determines the 
amount of these shares? Of course, these shares are derived ulti- 
mately from production, and as industry is now organized the social 
dividend is distributed in the first instance mainly among the pos- 
sessors of the productive agents. The laborer receives wages; the 
landlord, rent; the capitalist, interest; and the entrepreneur, profits. 
Ordinarily the payment is made in the medium of exchange, money. 
But money-wages, money-rents, etc., are merely the nominal shares 
in the distribution of wea th, and are called nominal wages, nominal 
rents, etc., accordingly. Real wages, rents, interest, and profits are 
shares or specific incomes of goods, and these shares plus taxes, etc., 
make up the amount of the social income or social dividend — the 
total of goods available for current use. 

The determination of these distributive shares is not of course 
effected in practice by formal division of the social dividend as a lump 
sum. The term social income does not refer to goods actually col- 
lected together as an aggregate, or administered collectively for society. 
Practically, wages, interest, and rent are fixed by the bargains of 
entrepreneurs, and represent what they pay for labor and for the 
use of capital and land. In other words, the problems in distribution 
are problems in value. 

It is not contended that in actual practice all individual incomes 
are in exact proportion to productive service rendered. In the individ- 
ual case, shares in the social dividend are secured in many ways and a 
multitude of forces bear upon the matter. For example, shares of 
the social dividend are often the result of gift, inheritance, customary 
or legal appropriation, force, fraud, or theft. Most incomes of adult 

75 



76 OUTLINES OF ECONOMICS 

persons, however, are received because of direct or indirect partici- 
pation in the productive process. 

Questions 

1. Was there any distributive problem when each household was 
economically self-sufficient ? 

2. If a man produces one commodity, how does he satisfy his 
wants ? Upon what will his ability to satisfy his wants depend ? 

3. If a man co-operates with others in making one commodity, 
can he expect to get more than a share of the product ? Try to answer 
the question : What determines the extent of the share he can secure ? 

4. "The distribution of wealth has become a practical problem 
because of speciaUzation in industry." Comment. 

5. "The theory of distribution is the theory of value applied to 
the valuation of productive services." Do you agree? 

6. "Since real wages, rent, interest, and profits are shares of 
goods, they must be paid from the products of industry already past; 
for the goods which any given land, labor, and capital are in process 
of producing are not yet available." Why or why not ? 

7. Can you say which is more important, the productive process 
or the distributive process ? Are they entirely separate and distinct ? 

8. "The only question of any real significance in economics is 
the question of distribution. Give us proper distribution." Do 
you think the amount to be divided has any significance ? 



II. Rent 

1. Introductory 

2. The Diferential Return (without necessary reference to any 
particular system of land ownership) 

3. The Relation of Economic Rent to Contract Rent in a Regime of 
Private Property 

4. Rent and Cost of Production 

5. Rent in Relation to Taxation 

6. Rent and Social Reform 

7. Econom'c Phenomena Analogous to Rent 



I. Introductory 

The term Rent is employed by economists in a special and tech- 
nical sense with reference primarily to the productivity of land. It 



THE DISTRIBUTIVE PROCESS 77 

is the return for the use of land under conditions which give it superior 
productiveness. 

As has been explained, the size of this return is a cjuestion involving 
the appHcation of the theory of value, and it depends, as always in 
a value problem, upon demand and supply. At this point the value 
discussion should be reviewed and the forces and manifestations of 
both demand and supply should be recalled to mind. 

Questions 

1. Is the demand for land a case of derived demand? elastic 
demand ? composite demand ? joint demand ? Show why you answer 
as you do in each case. 

2. In what w^ays is the supply of land influenced by each of, the 
following forces: (a) physical limitation; (b) character of the com- 
modity; (c) social Umitation, either formal or informal; (d) cost of 
production ? 

3. "In the case of land we have elastic demand and physically 
limited supply." Do you agree? 

2. The Differential Return (without necessary reference to any 
particular system of ownership) 

Let us assume a given demand for the services of land. It is 
then to be noticed that on the supply side conditions arise in actual 
practice which give rise to a "differential return." It is worth our 
while to reaUze that this "differential return" would exist under any 
organization of society. 

Since the superiority of one piece of agricultural land over another 
consists in its capacity to yield a given product at lower cost, and since 
the cost of transportation to market forms part of the cost of produc- 
tion, properly speaking, accessibility of location is no less important 
than fertility of soil in determining the rent of agricultural land. 
Hereafter such land will be regarded as good in proportion as it com- 
bines fertility with favorable situation. It need scarcely be pointed 
out that in the case of building sites location is often the only element 
of practical significance. 

Questions 

I (to illustrate agricultural rent by assuming extensive cultiva- 
tion alone). Suppose that in a certain self-sufficing community there 
are three plots of land, A, B, and C, of different grades such that the 
equivalent of 100 days' labor of a man with appropriate tools pro- 
duces on A 200 bushels of wheat; on B, 150; and on C, 100. That is, 



78 



OUTLINES OF ECONOMICS 



a bushel of wheat costs on A half a day of labor and capital service; 
on B, two-thirds of a day; on C, i day. Obviously A will be culti- 
vated first. B will not be cultivated until the demand for wheat 
warrants a labor and capital cost of two-thirds of a day per bushel, 
and C will be cultivated only when the demand warrants a cost of 
I day per bushel. Assuming that the product of each piece of land 
is limited to the amount specified above, make out a table such as 
is indicated below, showing the rental in bushels which would be paid 
for each plot of land under each of the given conditions. 



When Demand for Wheat Warrants 


Rental for Land 


Cost of 


A 


B 


C 


^ day per bushel 








f day per bushel 

I day per bushel 





2. "In the above question the causal connection is as follows: 
Demand increases, prices of products rise, therefore it will pay to 
resort to poorer lands, therefore the community does so, therefore a 
differential return on the better lands." Do you agree ? 

3 (to illustrate agricultural rent by assuming intensive cultiva- 
tion alone). Suppose that land A, as described in the preceding 
problems, is the only land available. If the application of more than 
loo days' labor on this land causes diminishing returns to appear, not 
more than 200 bushels can be raised at the initial cost per bushel of a 
half-day's use of labor and capital. Using the same figures as in 
Question i, assume demand to increase so that a total of first 100, 
then 200, and then 300 days' labor is applied with a resultant product 
of first 200, then 350, and then 450 bushels. Work out the rent in each 
case. Bear in mind that value in such cases must cover the cost of 
the marginal, or most costly, unit of the product. The total value of 
the crop will therefore exceed the total cost of the crop. 

4. In actual practice, both intensive and extensive cultivation 
are resorted to. Formulate a statement defining the amount of 
rent on a given piece of land. 

5. Define extensive margin of cultivation; intensive margin of 
cultivation. Is there any relation between the two ? 

6. Assuming demand, the cause of rent is the inadequacy of the 
better grades of land. This inadequacy depends upon (a) the physical 
scarcity of the better grades of land, and (b) the law of diminishing 
returns. Do you agree? 

7. If all land were equally good, could there be rent? 

8. Could the worst land under cultivation yield rent ? 



THE DISTRIBUTIVE PROCESS 79 

g. There are two islands, A and B, connected by a bridge. No 
other land exists. A can be used for cultivation alone, B for habita- 
tion alone, (a) Can any land on A have rent ? on B ? (b) Can all 
land on A have rent ? on B ? 

10. Does rent inevitably exist if lands of different fertility are 
cultivated ? — T. 

11. Is it quite correct to say that rent is caused by cultivating 
inferior lands? Could you establish that the cultivation of inferior 
lands might actually be a check to rent? — T. 

12. Can there be rent before all the land of the highest grade has 
been utilized ? — T. 

13. The physiocrats thought that rent was due to the bounty of 
nature. What do you think ? 

14. What would be the effect upon rent if new land were dis- 
covered ? if a railroad opened up a new country ? 

15. If the state owned all the land would there be any rent? 
Why? 

16. Can there be no-rent land? Can there be no no-rent land? 
Under what conditions ? 

17. ''The doctrine of rent breaks down because the doctrine of 
marginal cost is absurd. Suppose a man's marginal cost is 70 cents 
per bushel and w^heat is selling for 70 cents. If this man's average 
cost is 50 cents, he will be under strong incentive to increase his output. 
Thus marginal cost does not operate as powerfully as average cost 
in price determination and thus the rent theory breaks down." Why 
or why not ? 

3. The Relation of Economic Rent to Contract Rent in a 
Regime of Private Property 

For want of a better term let us call the " scientifically determined 
differential" discussed in the preceding section economic rent. Now, 
in this present society of ours, the actual payment for the use of land 
(sometimes called commercial or contract rent) may be widely different 
from the economic rent, owing to imperfect competition, custom, long- 
term contracts, etc. 

Questions 

1. Assuming perfect competition, establish that (a) the landlord 
cannot exact more than the economic rent from a tenant; {b) the 
tenant cannot secure the use of land without paying as much as the 
economic rent. 

2. Can you cite cases where commercial rent exceeds economic 
rent ? Cases where it is less than economic rent ? 



8o OUTLINES OF ECONOMICS 

3. Does contract rent tend to equal economic rent under the 
metayer system ? 

4. What determines the amount which would be paid for the use 
of: (a) timber lands? (b) ore-bearing lands? (c) city lots? (d) factory 
sites ? (e) land controlling sources of water power ? (/") fishing waters ? 

5. Are tenants likely to make permanent improvements upon 
rented land? Why? 

6. Is the "rent" of a down-town New York office rent in the 
economic sense of the term? 

7. How much could be exacted for the use of land if it afforded 
an absolute monopoly of the sources of some rare mineral ? 

8. What is the reason for the assessment for betterments when a 
street is improved ? 

9. Are we to term the income yielded by permanent improvements 
on land rent, interest, or profits ? 

10. Just what is the relation between commercial rent and eco- 
nomic rent ? 

11. What were the "corn laws" of England? Why did the land- 
owning classes oppose their repeal ? 

12. It is said that the development of the bicycle affected sub- 
urban-site rents. Explain. 

13. Will agricultural rents increase in the United States? Will 
urban rents increase ? Why ? Would your answer be the same for 
all sections of the country? 

14. What would be the effect upon rent of a sudden introduction 
of agricultural machinery? 

15. A 50-acre farm had a normal yield of 20 bushels of wheat per 
acre and the normal price of wheat was one dollar per bushel. For 
the effort the farmer put into this crop a return of I500 would have 
been what he would have secured in other pursuits, (a) What was 
the marginal cost ? (b) What was his rent ? (c) If by a temporary 
corner, wheat were to sell for $1 . 50 for a few days, would that affect 
marginal cost? Rent? 

16. "The price of land is ordinarily fixed by capitalizing the rental 
— i.e., a person will pay for a piece of land an amount, which if it 
were used for another investment equally secure and promising, 
would yield an income equal to the rent of the land." Do you 
agree ? 

17. "A man owned a lot which used to rent for $300. A boom 
occurred so that his property increased in value. Therefore he raised 
his rent to $400." What is the matter with this statement? — T. 

18. Which is true: " High rents result in high agricultural prices, " 
or, "High agricultural prices result in high rents"? — T. 

19. A certain site has an annual rental of $300. What would 



THE DISTRIBUTIVE PROCESS 8i 

its price be if the rate of interest were 8 per cent; 6 per cent; 5 per cent ? 
Formulate a general statement of the relation of rent, price of land, 
and rate of interest. — T. 

20. "The price of land depends upon the capitaUzation of its 
rental. Thus it happens that an investor in land receives the 
current rate of interest on his investment. To the business man there 
is no difference between land and capital. He gets the same rate of 
return from each." Why or why not? 

21. ''We all know perfectly well that much land which is not yet 
used will sell for a good figure. Take, for example, building land 
at the outskirts of the building section. Yet we are told the price 
of land is equal to the capitaUzation of its rental. The capitalization 
of rental in this case would be zero, yet the land will bring a good 
price." Comment. 



4. Rent and Cost of Production 

Questions 

1. In the case of a tenant, is the rent he pays one of his expenses 
of production ? 

2. If we could translate all the uses of land into one and say that 
land yielded simply commodity .v, would rent be an expense of pro- 
duction to a tenant? 

3. Suppose that the tenant mentioned in Question 2 should have 
his rents remitted by a benevolent landlord, would the tenant increase 
his output ? Would he sell this output at a lower price per bushel ? 
Does the payment of rent affect the price of x ? 

4. In fact, land is used for many purposes. Does the fact that 
buildings are erected on better lands than are now used for growing 
wheat cause the marginal cost of wheat to be greater than it would 
be otherwise ? 

5. Is rent determined by cost of production or is cost of production 
determined by rent in the simple case of one agricultural commodity, 
as wheat, raised on different grades of land ? 

6. If the ow^ners of wheat lands mentioned in the last problem 
refused to be paid for the use of their lands, would the cost of produc- 
tion of wheat be changed? 

7. Is rent a result of production, a condition preceding production, 
or an outlay in course of production, (a) in the case of newly reclaimed 
land wanted for only one use? {b) in the case of land which has 
proved its fitness for many purposes ? 



82 OUTLINES OF ECONOMICS 

5. Rent in Relation to Taxation 

Questions 

1. Assuming perfect competition and assuming the tenant leaves 
the land in as good condition as he found it, and assuming the fol- 
lowing cases of taxation: (i) a tax upon all lands equal to their 
economic rent, (ii) a tax upon all lands proportional to their 
economic rent, (iii) an equal tax upon all lands used, explain: (a) 
Whether the landlord could shift the burden of the tax to the ten- 
ant ? (b) What would be the effect of the tax upon agricultural 
prices ? 

2. In actual practice who would be likely to bear the burden of 
the tax in each of the above cases ? 

3. How would the price of land be affected in each of the above 
cases ? Would the man who bought the land after the tax had been 
imposed bear any of the burden of this taxation ? 

4. How would a tax of 10 cents per bushel on wheat affect rents ? 

6. Rent and Social Reform 

Land is characteristically a free gift of nature, and many of the 
advantages of owning land are the results of natural or social condi- 
tions which the owner has done nothing to bring about. Hence the 
income of the landlord has been called the unearned increment, and 
social reformers have desired to aboHsh it. 

Questions 

1. Give a striking case of the unearned increment from your own 
experience. 

2. Do the rents in Gary constitute a case of unearned increment ? 

3. Did individuals or society at large create the conditions which 
caused rent to emerge ? 

4. Do you consider that the real justification of private property 
in land is the fact that the acquisition of the land has involved effort 
and sacrifice, or the fact that land held as private property is more 
likely to be utilized efficiently for production ? 

5. Can it be said that at present the rent surplus is practically 
to be regarded as interest on the money spent in the purchase of the 
land ? Does that make any difference in the justification of rent ? 

6. "Farm rents should be abolished. They add just so much 
to the cost of the laborer's food. The state should own the land and 
then labor could have cheaper food." Comment. — T. 

7. Would the amount of available land be changed if private 
property in land were abandoned ? 



THE DISTRIBUTIVE PROCESS 8 



8. Is land-owning always a profitable matter ? 

9. Can you specify any gains for society from having private 
ownership of land ? 

10. If land nationalization is to be resorted to would you favor 
accomplishing it by the method of compensation or by that of con- 
fiscation ? Why ? 

11. Is it right to buy stolen property? Since land is nature's 
gift, has one a better right than another to it? Could we justify 
confiscation by this line of reasoning ? 

12. Would you regard it as confiscation to tax away all future 
unearned increment ? Could it be done ? 

13. Do you think that land nationalization would result in an 
assured increase in public income ? 

14. Do you think a tax on rent would depress industry seriously ? 



7. Economic Phenomena Analogous to Rent 

The principles of rent have often been extended to explain by 
analogy economic phenomena other than the differential return to 
land. Thus the excess of the total utiUty of a commodity over its 
total cost is called consumers' rent; the excess of interest received 
for loans of capital above the cost of saving which lenders have 
incurred is called savers' rent, etc. 

Again, the higher earnings of specially skilled workmen or highly 
efficient entrepreneurs are often likened to rent. 

A particularly interesting analogy is presented by the case of 
capital goods which cannot readily be duplicated or increased in 
amount, and which thus afford at least temporarily a superior and 
limited productive service. The return for such services has been 
called quasi-rent and marks the borderland between rent and interest. 



III. Wages and Trade Unionism 

1. The Demand for Labor 

2. The Supply of Labor 

3. Some Practical Applications of the Principle of Demand and 
Supply 

4. The Specific Productivity Theory of Wages 

5. Trade Unionism 

The problem here is the evaluation of the services of labor. 
Wages in a specific case are the payment given for labor service 
rendered. Strictly, wages are economic goods — commodities and 



84 OUTLINES OF ECONOMICS 

services (real wages). Practically, labor is paid for in money (money- 
wages or nominal wages) which gives the laborer command over these 
goods. 

Our discussion will center on the meaning of demand and supply 
as appUed to labor. 



I. The Demand for Labor 

Questions 

1. Is the demand for labor a derived demand? a composite 
demand ? a joint demand ? an elastic demand ? a case where the prin- 
ciple of substitution has wide play ? Prove your answer in each case. 

2. In determining the wage of a particular man, are we concerned 
with the " demand for labor in general, " or with the demand for labor 
of the kinds he can furnish, or with the demand for labor in his trade ? 

3. Since labor is in demand simply as a means to the attainment of 
the utihties it serves to produce, the maximum price which will be paid 
for labor can never normally exceed the normal price of the product. 
Whenever land, tools, etc., are necessary in production the maximum 
price which could be paid for labor will be less than the price of the 
product by the amount which must be spent for the use of the other 
productive factors. And whenever a substitute for labor (e.g., 
machinery) is available, the demand for labor is in so far reduced. 
Do you agree? 

4. Is the demand for the labor of footmen direct or derived? 
Is it a joint demand ? 

5. Are these acts necessarily offers of employment to labor: 
(a) an offer to purchase a watch; {b) an offer to let a contract to 
build a $100,000 house; {c) investment of $1,000 in a savings bank? 

6. Does a demand for antiques, paintings by old masters, etc., 
affect the general demand for labor? 

7. Is the demand for commodities already manufactured a demand 
for labor ? 

8. If it takes 20 days to make an automobile, does an order for 
immediate delivery of an automobile create a demand for labor? 

9. Does the manufacture of shoes create a demand for the employ- 
ment of labor in other industries? 

10. Will wages be higher in a sparsely settled country or in a 
densely settled country, assuming rich natural resources in each case ? 

11. Speaking generally, does the laborer gain or lose by working 
under conditions of abundance of land and capital ? 

12. If a factory town is destroyed by fire will wages throughout 
the country at large rise or fall ? 



THE DISTRIBUTIVE PROCESS 85 

13. Why should not the farmer who uses good land pay higher 
wages than the farmer on poorer land, instead of paying rent ? 

14. "Labor is desired for its productivity. Demand for labor 
cannot exceed its productivity, and as there is a law of diminishing 
returns in industry we get the typical decUning demand curve." 
Why ? Does the quotation mean that we can separate the produc- 
tivity of labor from that of co-operating factors ? 

15. Make a list of the factors affecting the demand for street 
cleaners in Chicago; a physician in a small town; a barber. 

2. Supply of Labor 

When we w^ere discussing the topic 'S-alue" we treated the forces 
of supply under the following headings: 
i. Physical Limitation 
ii. Character of the Commodity 
iii. Social Limitation, Formal and Informal 
iv. Monopolistic Limitation 
V. Cost of Production 
These forces apply in the case of the supply of labor. 

Questions 

1. Is there at a given moment any physical limitation of labor 
supply ? 

2. What relation exists between standard of living and supply 
of labor ? 

3. Ordinarily an increased demand for a commodity which is not 
absolutely limited in amount will result in an increased supply. To 
what extent would this be true of laborers ? of labor ? 

4. To what degrees and in what ways is the supply of labor 
service affected by (a) perishability ? (b) difficulty of transportation ? 

5. ''The ow^ner of labor cannot be separated from the commodity 
he sells. He must deliver it in person. This makes a difference in 
the supply of labor." How? 

6. Cite cases where formal social limitation affects the supply of 
labor; cases w^here informal social Hmitation affects it. 

7. Do you think that immigration increases the supply of labor? 

8. Under which of the forces of supply indicated above come all 
the various factors making for individual efficiency ? Does individual 
efficiency enter into demand also? 

9. Cite cases of monopolistic hmitation of the supply of labor. 

10. Does cost of production in the case of labor mean {a) mere 
subsistence of the particular laborer? (b) mere subsistence plus a 



86 OUTLINES OF ECONOMICS 

return for expense of training ? (c) sufficient return to enable a laborer 
to rear a family ? If the last, how large a family ? 

11. Does what it "cost to produce" a given laborer determine 
his wage? Does it have any bearing on the rate of wages in the 
future ? 

12. Does the amount of labor which will be supplied depend to any 
extent upon the rate of wages ? 

3. Some Practical Applications of the Principle of Demand 
AND Supply with Reference to Wages 

Questions 

1. It has been said that an increase in the number of laborers 
cannot depress general wages because this increase implies a corre- 
sponding increase in consumption and in demand for labor. Is 
anything overlooked in this argument ? 

2. What would be the effect upon wages of a sudden introduction 
of machinery ? 

3. Why are the wages of skilled managers greater than those of 
street cleaners ? 

4. Why are the wages of servants higher in the United States 
than in England for the same grade of service? 

5. What would you have to pay a cook in an Alaskan gold- 
mining camp? 

6. Laborers on railway embankments in India were paid, according 
to Mr. Brassey, from 9 to 12 cents a day, but in England from 75 to 

87 cents a day, and yet the expense of building a mile of railway 
was about the same in the two places. How do you account for 
this? 

7. When Oregon was held by the Modocs and other Indians, it 
was as rich in natural resources as now. Did the Modocs get as high 
wages as settlers do now ? What is the reason for the vast difference 
between their earnings ? 

8. Does unskilled labor suffer as much as skilled by forced changes 
to new employment ? 

9. Can laborers, by strikes and combinations, raise their w^ages 
to a point where nothing is left for capital and interest ? Why not ? 

10. Differences of wages have been classified as follows : 
(i) Differences of Wages for Different Employments. 

(i) Differences tending to equalize the advantages of all occipa- 
tions by making reward proportionate to effort and sacrifice. 

(ii) Differences arising from the more or less limited number of 
persons whose aptitudes, inborn or acquired, permit them 
adequately to perform a given task. 



THE DISTRIBUTIVE PROCESS 87 

(2) Differences of Wages for Different Persons in a Given Employ- 
ment. 
Differences corresponding to differences of efficiency. 
Explain wherein each of these differences is due to conditions of 
demand and wherein due to conditions of supply. 

11. Do differences of wages as between occupations correspond 
to differences in the marginal productivity of labor ? 

12. In a certain office a man and a woman are sitting side by side 
doing the same work. The woman is, if anything, more efficient 
than the man. Her wage is considerably lowxr. Explain how this 
can be ? 

13. What reasons can you offer to explain why the wages of w^omen 
are generally lower than the wages of men ? 

14. If trade unions could establish a rule that women should have 
the same wages as men wherever they are employed in similar work 
would men or women derive the greater benefit from the rule ? 

15. If we had a caste system would there be a series of non-com- 
peting groups ? 

16. Do social groups, whether based upon wealth, education, 
social position, unusual ability, etc., bring about a condition of 
non-competing groups ? 

17. In the United States are the barriers between groups effective 
barriers ? 

18. '' To secure the practical results of free competition as between 
employments it is not necessary that every person in any one employ- 
ment shall be free to change to another. If a few are mobile their 
shifting will ordinarily suffice to adjust the supply of labor to the 
demand in each employment." Do you agree? What bearing has 
this on the theory of non-competing groups? 

19. "Competition between apparently non-competing groups 
is in some cases made operative by an application of the principle 
of substitution. It may be possible, e.g., to replace skilled laborers 
by unskilled laborers working with improved machinery. The gap 
which exists between the two grades of labor is here bridged by 
substituting capital for superior skill of workmen." Do you agree ? 

20. What effect on wages should you expect as a result of better 
provisions for free technical education ? 

21. Are the farmer, the miller, and the baker members of the 
same group of laborers, or of competing groups, or of non-competing 
groups ? 

22. Allowing for all the influences thus far considered, what con- 
ditions fix the maximum and minimum limits to the rate of w^ages 
in a particular case? 



S8 OUTLINES OF ECONOMICS 

23. What determines the wage actually paid, within the limits 
above mentioned? 

4. The Specific Productivity Theory of Wages 

The value of labor appears to depend on the efficacy of labor. 
The efficacy of labor in turn depends on the manner in which labor 
is employed. Under certain conditions of demand and supply, labor 
may be used in conjunction with land and capital so inadequate that 
the product of the industry is restricted by the intensive operation 
of the principle of diminishing returns. In such cases where the 
labor force is disproportionately large, the product per laborer will 
be small. 

This suggests the principle that individual wages for a given grade 
of labor will not exceed the amount which is added to the product 
by the effort of the marginal laborer; that if the supply of labor is 
not excessive, and if laborers are able to exact favorable terms of 
employment on account of competition among persons who wish to 
hire them, wages will not fall substantially below the amount of 
the product added by the marginal laborer. The term "marginal 
laborer" means here, as most commonly, not the least competent 
laborer but the laborer of normal capacity employed under the con- 
ditions least favorable for his productiveness. 

The theory that wages correspond to the marginal productivity 
of labor (i.e., to the productivity of those laborers who are least 
effectually employed) is known as the specific productivity theory 
of wages. Its adequacy to explain actual wages is disputed. At 
least it affords an interesting suggestion for the analysis of the demand 
for labor. 

Questions 

1. Why should laborers in general consent to the remuneration 
which conforms to the product of the marginal laborer — i.e., of the 
laborer employed under most unfavorable circumstances? Could 
they force the employer to pay more ? 

2. Can the laborers control the conditions which make the mar- 
ginal productivity of labor small ? 

3. Suppose an increase in the number of persons seeking employ- 
ment as laborers without any increase in the number of consumers 
of the products of labor: What will be the effect on wages ? Will this 
effect be due to change in the marginal utility of the product or to 
change in the marginal productivity of labor ? 

4. Show that the specific productivity theory of wages is in accord 
with the demand-and-supply theory. 



THE DISTRIBUTIVE PROCESS 89 

5. Trade Unionism 

a) Causes of Trade Unionism 

b) Trade Union Organization and Demands 

c) Trade Union Theory 

d) Trade Union Policies and Methods 

e) The Social Problem of Unionism 

Trade unions, like railroads and trusts, are an important factor 
in the productive organization of industry. The unions have devel- 
oped into a complex organic network which tends to parallel the 
pecuniary and political organization of society and influences eventu- 
ally the productive process. 

Trade unions are discussed in this outline under the distributive 
process because they are organized to secure, primarily, higher wages, 
shorter hours, and better conditions of employment generally for their 
members. They seek these ends by a great variety of means. Promi- 
nent among these means are: (i) the establishment of a standard or 
uniform rate of wages for each kind of work; (2) the fixing of a normal 
or uniform working day or week; (3) the establishment of standard 
or uniform methods of work and processes of production; (4) limita- 
tion and control of the speed and output of the workers; (5) entrance 
restrictions and apprenticeship regulations; (6) arbitration and con- 
ciliation; (7) strikes and boycotts; (8) trade union insurance, and 
(9) labor legislation. 

The activity of trade unions has of late greatly stimulated the 
organization of employers' associations. Some understanding of 
these associations is essential to an estimate of the significance of 
unionism. 

a) Causes of Trade Unionism 

Questions 

1. How do the economic functions, status, and social environment 
of the wage-workers and the employers differ essentially ? 

2. What is it that has caused these differences and what was their 
historical origin ? 

3. Do such differences create diverse notions on the part of workers 
and employers in regard to justice, rights, and importance of economic 
functions ? 

4. If you were a wage-worker would you feel that your interests 
and those of your employer were essentially opposed in any vital 
matters ? 



go OUTLINES OF ECONOMICS 

5. Under the conditions of capitalistic production and distribu- 
tion has the individual employer a distinct advantage over the indi- 
vidual worker in the bargaining which immediately fixes wages and 
conditions of employment ? 

6. Under modern conditions is the employer disposed or forced 
to exercise to the full extent any bargaining advantage which he 
may have over the workers ? 

7. Under what circumstances and in what ways might trade 
unions be of distinct advantage to employers ? 

8. As a matter of fact, when and under what circumstances were 
trade unions first organized ? 

9. Are unions at the present time usually of spontaneous origin ? 
What circumstances ordinarily lead to their organization? 

b) Trade Union Organization and Demands 

Questions 

1. What are the essential differences between a trade union, an 
industrial union, and a labor union? Name an example of each 
type. 

2. What is a local union? What is a national or international 
union? What are the general relations between the local and the 
national union ? 

3. Name ten important national or international unions. About 
how many such unions exist in this country ? What are the principal 
federations and groups of such unions in America ? 

4. What are the principal structural units which make up the 
American Federation of Labor, and what are their organic relation- 
ships ? 

5. What, in general, are the functions and functional relationships 
of each of these units ? 

6. What are the principal union officers? Describe the duties 
ordinarily performed by the secretary, the organizer, the walking 
delegate or business agent. What is the sovereign union authority ? 

7. What is the organic strength of the American Federation of 
Labor? What is its general political, economic, and social attitude 
and what are its most important demands ? 

c) Trade Union Theory 

Questions 

I. Some unionists look with disfavor upon the individual who 
"uses up more than his share of the demand for work." Examine 
the practical validity of this attitude. 



THE DISTRIBUTIVE PROCESS 91 

2. Why do unions attempt to establish the principle of uniformity 
with respect to wage rates, hours of work, and conditions of emj)loy- 
ment generally in a trade ? 

3. By what arguments do unions support their attempts to 
limit and control the speed and output of w^orkers ? 

4. On what grounds do unions attempt to limit the numbers and 
control the w^orkers in a trade? 

5. Employers claim that unions attempt to prevent the introduc- 
tion of machinery and improved processes. How w^ould union 
advocates justify such attempts ? 

6. Unionists claim that "high wages breed high wages." On 
what assumptions is this claim based ? Are they legitimate assump- 
tions ? 

7. Can shorter hours and better conditions of employment be 
secured by all workers without lowering the wages of some ? 

8. When one set of workers secures higher wages without increas- 
ing their output, must someone else suffer ? If so, who ? 

9. Will increase of the efficiency of one group of workers necessarily 
increase their wages or make it possible for them to secure higher 
w^ages ? 

10. If the anthracite coal miners forced the mine owners to grant 
a 20 per cent increase in wages, who might foot the bill ? 

d) Trade Union Policies and Methods 

Questions 

1. What is the practice of unions in regard to the admission of 
members? If the union refuses to admit a capable man does the 
union gain ? Does anyone besides the debarred worker suffer ? 

2. What is the policy of unions in regard to apprenticeship? Is 
union apprenticeship an effective method of training skilled workers ? 
What are the actual purposes of unions in maintaining the apprentice- 
ship system ? 

3. Unionists claim that they favor industrial education "when 
it does not play into the hands of the employers." Explain this 
statement. 

4. Most unions demand and attempt to enforce the union or closed 
shop ; most employers are bitterly opposed to it. Why in each case ? 

5. Unions attempt to establish a minimum wage for each kind 
of work and a maximum number of hours that a man may w^ork. 
Why, in each case ? 

6. In many recent wage disputes agreement w^as reached by three 
men — a representative of the employers, a representative of the unions, 
and a third chosen by these tw^o. What is this mode of settling 



92 OUTLINES OF ECONOMICS 

disputes called ? How does it differ essentially from collective 
bargaining ? What are the relative merits of the two methods ? 

7. Trade agreements between employers and unions frequently 
cover thirty or more subjects. What are some of the more important 
of these subjects ? Why do unions insist on such complex bargains ? 
Who negotiates such agreements for the unions? 

8. Can a strike increase wages? Can a strike raise the wages 
of workers not engaged in it ? Is every increase of wages by strike a 
cause of lower wages? What are the principal reasons given for 
calling strikes? Most trade unionists claim that they do not favor 
strikes; why, then, are unions and strikes closely associated in the 
public mind ? In Philadelphia recently the workers in many manu- 
facturing establishments walked out because the street-car men were 
on strike; what is the purpose of such action ? What is such a strike 
called ? Is it legal ? 

Q. In the last telegrapher's strike in Chicago workers in front 
of the Western Union offices were arrested for "vagrancy." What 
strike duty were they performing at the time? Was their occupa- 
tion legal ? 

10. Unions are violently opposed to " scabs " and "rats, " and such 
persons frequently fall into the hands of "educational committees." 
Explain the meaning of this statement. If you were a unionist 
would you have the same attitude toward scabs, and if so, w^hy ? 
Unionists claim that they discountenance violence in strikes but that 
the government almost always favors the employers in the use of 
the police force; reconcile these statements. 

11. In a labor controversy the employer sometimes discharges 
all the workers; what is this action called? Has the employer a 
right so to discharge ? A worker frequently complains that he cannot 
get work because he is blacklisted; what is the meaning of this? 
Are blacklists legal ? What are their chief faults ? 

12. What is an injunction? What is the present law in regard 
to the issue of injunctions? What can be enjoined in a contest 
between workers and employers? Why are injunctions especially 
effective in suppressing strikes ? 

13. Do the unions act as effective employment agencies? Why 
does a good unionist demand "union labor goods"? What kinds 
of insurance do the unions offer to their members ? It is said that a 
full union treasury and strike benefits are effective means of raising 
wages; how does this square with the theory of w^ages ? 

14. What are the chief employers' associations in the United 
States ? What are the main methods used by employers' associations 
in fighting unions ? Can trade unions maintain an effective opposi- 
tion to employers' associations and trusts ? 



THE DISTRIBUTIVE PROCESS 93 

15. Many employers declare that they believe in trade unions. 
What reasons are there for such a statement ? 



e) The Social Problem of Unionisfn 

Questions 

1. Samuel Gompers believes that trade unions are one of the 
greatest educative forces in the country. Can you find grounds for 
this behef ? 

2. If all the workers belonged to the unions, could the wages and 
conditions of employment be raised for all by union policies and 
methods ? 

3. It is said that unions create an aristocracy of labor. Is it 
better socially to have a few workers highly paid and many poorly 
paid than to have all workers very moderately paid ? 

4. In some trades the American standard of living is threatened 
by the competition of immigrants satisfied with low^ w^ages and poor 
living conditions. Are the unions performing a social service in 
attempting to maintain the American standard in these trades at 
all hazards and by all means ? 

5. If trade unions and employers are opposed, industry is likely 
to be unproductive and the pubHc service interrupted; if the unions 
and employers combine, monopoly is likely to be the outcome. Is 
there any escape from this dilemma ? 

6. Periodically the supply of coal is threatened by a disagreement 
between united mine workers and the mine owners. Is this an 
effective argument for government ownership of the coal mines ? 

7. Would it be well to have a law in the United States similar 
to that of New Zealand providing for the compulsory arbitration of 
trade disputes ? What is the attitude of the employers and unions 
in this country toward compulsory arbitration, and why ? 

8. Would it be well to have a law in this country providing for a 
government investigation of all cases where strikes or lockouts are 
threatened on pubHc utiUties and mines, and the publication of the 
facts before a strike or lockout would be permitted ? 



IV. Interest 

1. Introductory 

2. The Demand for Capital 

3. The Supply of Capital 

4. General Questions on Interest 



94 OUTLINES OF ECONOMICS 

I. Introductory 

Interest is the income from the use of capital. It is a part of the 
social dividend and represents the price paid for the services of capital. 

Capital has been defined as wealth used for further production. 
This is capital from the point of view of society, or social capital. 
All such capital is producers' goods. There are, however, some forms 
of consumers' goods which, while not capital to society, still are not 
used directly to satisfy the wants of the owner, but only as a means 
for obtaining an income — e.g., a dweUing rented to another person. 
These goods are acquisitive capital. Either kind of capital may 
yield interest. 

The business man, as has previously been suggested, frequently 
speaks of the sum total of wealth invested in his business as his capital, 
regardless of whether this wealth consist of land, machinery, or w^ages 
advanced to labor. Similarly, he is apt to speak of the return from 
any income-yielding investment as interest, irrespective of the ques- 
tion whether the income is derived from capital, land, or any other 
source. 

The question where to draw the line between interest and profits 
is something upon which economists have not entirely agreed. For 
present purposes we may, however, distinguish: (a) the return to 
capital; {b) the compensation for risks and for the uncertainties of 
industry; (c) the wages of superintendence — a reward for the effort 
and skill of management; (d) the return due to superior bargaining 
position. The first of these is interest. The last three are usually 
included under profits, though some persons argue that the third 
should properly go under wages, and apply the term profits to a return 
of a different sort. 

Questions 

1. Can any part of the earnings of a bootblack be called interest ? 

2. Is the income derived from the following interest: a railroad 
bond; a share of stock in a land company; a share of stock in a coal- 
mining company ? 

3. A business man receives a salary of $10,000 a year as president 
and manager of a shoe-manufacturing concern; he receives a dividend 
on some stock in the same company which he happens to own; he 
is an active partner in a profitable leather firm ; he owns a 5 per cent 
mortgage on some city real estate, 100 shares of stock in the U.S. 
Steel Company, 50 shares in the American Tobacco Company, and 
has a savings bank deposit paying 3 per cent. What would you call 
the income received in each case ? 

4. When a concern declares an unearned dividend is the stock- 
holder getting interest ? 



THE DISTRIBUTIVE PROCESS 95 

2. The Demand for Capital 

Questions 

1. Is the demand for capital a derived demand? a composite 
demand ? a joint demand ? an elastic demand ? a case where the prin- 
ciple of substitution has wide play ? 

2. Is the demand for capital made up merely of demand for pro- 
ducers' goods ? 

3. Is the demand for shoes, overalls, candy, steel rails, a demand 
for capital ? 

4. Would a new and important invention increase the demand for 
capital ? Would the discovery of a valuable lead mine ? 

5. How would a rapid increase in the supply of labor affect the 
demand for capital ? 

6. Why do people who borrow money to buy consumers' goods 
which result in no new product have to pay the same rate as if they 
were borrowing to pay for productive capital ? 

7. Does the demand for capital depend upon its productivity? 
If so, what factors make for large productivity? What ones for 
small productivity? 

8. How did the destruction of San Francisco affect the demand for 
capital ? — T. 



3. The Supply of Capital 

Questions 

1. Are there physical limitations to the supply of capital? social 
limitations ? monopolistic limitations ? cost of production limitations ? 

2. How would a sudden increase in the efficiency of industry affect 
the supply of capital ? 

3. In what ways might a more general and a better education of 
the people affect the supply of capital ? 

4. How does the constant breaking out of war among the Central 
American states affect their supply of capital ? 

5. How did the destruction of San Francisco affect the supply 
of capital? 

6. ''In so far as cost of production affects the supply of capital 
there are two factors concerned: (a) the cost of producing wealth; 
(h) the cost of saving wealth.'' Why or why not? 

7. Capital is the result of saving and the supply of capital depends 
on the amount saved. That in turn depends upon (a) the savable 
fund, and (b) the effective desire of accumulation. Do you agree? 



96 OUTLINES OF ECONOMICS 

8. Some persons would set aside and save some of their funds 
apart from any intention to invest them profitably. But it has been 
found that more capital can profitably be used than would thus be 
suppUed; in short, the demand is greater than the supply which would 
be forthcoming if it were not for the payment of interest. Therefore, 
in order to secure additional capital, a premium is given in the form 
of interest. Do you agree ? 

9. The rate of interest has to be sufficient to compensate for the 
sacrifice made in saving the last or marginal unit of capital — the 
unit which represents the greatest sacrifice in saving. Why or why 
not? 

4. General Questions on Interest 

Questions 

1. Can you reconcile the statement that the rate of interest is 
determined by the marginal productivity of capital with the state- 
ment that it is determined by demand and supply ? 

2. It has also been stated that it is the difference between the 
estimation of the present and future value of the last unit of capital 
saved which determines the rate of interest. Can you reconcile this 
with the previous statements ? 

3. How can you explain the fact that several centuries ago the 
rate of interest on investments in Holland was around 2 per cent, while 
today it is considerably above that? 

4. Can legislation effectively regulate the rate of interest ? 

5. Is interest different from usury ? If so, what is the difference ? 

6. Is capital mobile ? Does it move freely from one country to 
another? How extensive is the market for capital? 

7. Are there differences in the rate of interest as between different 
places or different occupations which cannot be explained by differ- 
ences in risks ? 

8. Why has the rate of return on investments been around 10 per 
cent in the West, 7 per cent in the Central states, 5 per cent in New 
York, and 4 per cent in Germany ? 

9. Does the net return from an investment in capital such as a 
steel plant tend to equal the net return from the same amount of 
money invested in land, assuming the risk to be the same ? 

10. Does the existence of fixed capital tend to cause differences 
in the rate of return on investments of that character ? 

11. Interest is a return over and above the amount required to 
replace the principal. Do you agree? 

12. It is said that interest is paid for capital, not for money. Is 
this true ? 



THE DISTRIBUTIVE PROCESS 97 

13. What is the money market ? Who are the buyers and sellers ? 
What do they buy and sell ? 

14. Does the supply of money on the market affect the rate of 
interest ? 

15. When gold is leaving England the Bank of England raises 
the rates of discount. Does this show that the amount of money deter- 
mines the rate of interest ? 



V. Profits 



1 . Introductory 

2. The Risks of Industry 

3. General Questions on Profits 



I. Introductory 

Profits are the share of the industrial product which goes to the 
entrepreneur. The chief elements entering into profits are — 

a) The wages of management, a return for accepting the labor and 
burden of management. This element tends to equal the amount 
which the manager could get if he were employed at a fixed salary. 
Some prefer to classify this under the head of wages. 

b) A gain or loss resulting from the risks inevitable in industry. 
Not only is there uncertainty in undertaking a new industry, but 
the more or less extended period of time required for production leaves 
any industry subject to the risks arising from chance or uncertain 
events. 

c) An acquisitive gain due to superior bargaining power, whether 
due to monopoUstic or other conditions. For example, monopoUstic 
position may enable the charging of higher prices for products, the 
paying of lower prices for materials, the control of labor supply, the 
acquisition of special privileges from public and semi-public bodies, 
such as low^ taxation and railway rebates, etc. 



Questions 

1. Are the following entrepreneurs: a cobbler, a farmer, a consult- 
ing engineer, the boss of a section gang, a banker ? 

2. In a corporation there may be bondholders, stockholders, 
directors, a president, treasurer, and general manager. Who is 
the entrepreneur ? 



98 OUTLINES OF ECONOMICS 

3. Should the income of an inventor be classified as wages or 
profits ? 

4. A promoter buys up various street railway lines, forms a 
new company, which is greatly over-capitalized, and sells the stock 
at a gain. Is the gain profit, and if so, what kind of profit ? 

5. What sort of profit do you think has been the basis of most of 
the more recently acquired large fortunes in this country ? Are they 
a result of acquisitive or productive effort ? What have the owners 
done to serve society? 

6. The syndicate which underwrote the securities of the U.S. 
Steel Company is said to have made over $40,000,000. Was that 
profit ? Do you think it was earned ? 

7. Give an illustration taken from the business world of each of 
the different sources of profit mentioned in the classification given 
above. 



2. The Risks of Industry 

a) The Nature of Industrial Risks 

b) Speculation in Relation to Risks 

c) Insurance in Relation to Risks 



a) The Nature of Industrial Risks 

Questions 

1. Describe some of the chief risks in industry. Group these into 
classes. 

2. Is the process of production in modern industry spread over a 
longer period of time and is it more roundabout than formerly? 
How does this affect risks ? 

3. If conditions remained perfectly static, so that a person could 
foretell just what the future would bring forth, would risks disappear ? 
Would the assumption of static conditions rule out climatic changes ? 
Do you think risks are hkely to disappear ? 

4. Are risks greater in a changing condition of industry? Why 
or why not ? 

5. Is it possible by foresight and calculation to reduce some of 
the risks of industry ? all of the risks of industry ? 



THE DISTRIBUTIVE PROCESS 99 

6. Is it possible l)y foresi^jht and calculation to avoid some of the 
risks of industry? all of the risks of industry? 

7. If we were to have a sociaHstic society would risks disaj^pear? 

b) Speculation (especially in its relation to risks) 

We may distinguish two forms of speculation: {a) industrial; 
(6) commercial. Industrial speculation consists in preparing for 
market, by changing the form, products the demand for which is 
uncertain, or products whose conditions of production are unknown or 
shifting. Commercial speculation consists in buying goods in one 
market and selKng them in another where different price conditions 
prevail and in buying at one time for sale in a more or less remote 
time. A certain degree of speculation is inherent in all competitive 
business. Successful speculation involves profits; the speculator 
is, however, alw^ays exposed to losses. 

Both industrial and commercial speculation are carried on largely 
by persons who make a careful study of conditions of supply and 
demand, and are therefore better fitted to perform this function than 
are others. The chances of sudden wealth, however, attract to the 
speculative market large numbers of men who have no special knowl- 
edge of conditions affecting the goods in which they deal. Not only 
do they usually suffer personal losses; but through rash buying when 
prices tend to rise and precipitate selling when prices tend to fall 
they exaggerate the natural tendency toward price fluctuation. There 
are also men who are skilled in market conditions who manipulate the 
market and cause fluctuations which would not otherwise exist. 

When a speculative market has developed, the actual producers 
of commodities can frequently transfer many of the risks of price 
change to the professional speculator. In a speculative market 
contracts for purchases or sales may be made at any time, to mature 
at some future period. A man who contemplates producing pig 
iron may insure himself against a price insufficient to cover materials 
and other expenses by selling pig iron for future delivery to a specu- 
lator. If the price of pig iron declines it is the speculator who bears 
the loss. When the finished product is not of a character to admit 
of speculative dealings, the manufacturer may nevertheless insure 
himself against serious price fluctuations by speculative deaUngs 
in the raw materials, since the finished product and the raw material 
usually undergo parallel price fluctuations. An example (adapted 
from Taylor) will illustrate: 

If quotations are for 

Cash wheat in February $1 .02 

May wheat in February i . 04 

Cash wheat in May i . 01 



lOO OUTLINES OF ECONOMICS 

then the transaction will be as follows : 

February Wheat Account May Wheat Account 

Cost of cash wheat $10,200 Received for "short sale" of 

Storage, insurance, interest, May wheat in February . . . $10,400 

etc 250 Cost of cash wheat in May to 

"cover" 10,100 

Total cost in wheat 10,450 

Value in May of the wheat used Profit on transaction $300 

in making the flour 10,100 

Miller's loss by fall in price. . $350 

Thus of the $350 lost on the February wheat $300 is made up by 
the "hedging" transaction in May wheat. 



Questions 

1. Work out the above case of dealing in wheat, substituting, as 
the price of cash wheat in May, (a) $1 .08, (b) $0.90. 

2. Do men speculate because prices fluctuate or do prices fluctuate 
because men speculate? 

3. A certain cotton manufacturer displays great abihty in the 
production of cloth, but he is nevertheless barely able to keep his 
head above water, because he is a poor judge of the raw cotton market 
and is more likely than not to buy when prices are inflated. Show 
how he could liberate himself from the consequences of this defect 
of judgment. 

4. Miller A always covers purchases of wheat for milling by 
corresponding short sales. MiUer B boasts that he is no speculator, 
and refrains entirely from transactions on the exchanges. Whether 
prices rise or fall, A is insured his miller's profit, and never receives 
more. If prices rise, B makes a profit over and above his miller's 
profit. When prices fall, not only may his miller's profit be wiped 
out, but he may incur additional losses. Which one is really the 
speculator ? 

5. In 1906 a shipment of Dakota grain was sent by way of Seattle 
to Japan. By the time the grain reached Japan the prices of wheat 
there had fallen so low that this shipment was reconsigned to Liver- 
pool, and sold at a price inferior to that paid for the wheat in Dakota. 
Did the actual shippers of the wheat necessarily lose on the trans- 
action ? 

6. Speculators are often regarded as mere gamblers. If the whole 
body of speculators were to cease buying and selhng grain, and limited 
themselves to betting upon the course of prices, would the work of 
commerce and industry be carried on exactly as it is at present ? 



THE DISTRIBUTIVE PROCESS loi 

7. Farmers often urge the abolition of speculative exchanges on 
the ground that they (le})ress the price of prockice; millers and spinners 
urge this abolition on the ground that they enhance prices. What 
is your opinion of the situation ? 

8. Would speculation be destroyed if the organized si)eculation 
of the exchanges were prohibited by law ? 

9. Short sales are often attacked on the ground that they create 
an artificial increase in supply and so tend to depress prices. What 
is your criticism of this view ? 

10. Short sales of land are by nature impossible. Does this 
fact interfere with speculation in land, or make such speculation less 
hazardous than speculation in produce or securities ? 

11. During the Civil War certain wool manufacturers made 
enormous profits because of the rise in price of raw materials which 
they had on hand. After the war there were cases where these profits 
were nearly wiped out by losses consequent upon the fall in prices 
of raw materials. Explain. Could the loss have been avoided ? 

12. Industrial speculation anticipates the wants of society. If 
the speculator has judged wisely, society is better provided with 
goods than it would have been had its entrepreneurs been averse to 
taking chances. If the speculator has miscalculated, he incurs a 
pecuniary loss and society suffers from wasted resources. Is this 
true ? Write out a similar statement concerning commercial specu- 
lation. 

13. State briefly your opinion of the relation of speculation to 
industry. 

14. How do you distinguish between socially desirable and socially 
undesirable speculation ? 

c) Insurance (especially in relation to risks) 

The discussion of speculation showed that in many cases specu- 
lative markets make insurance against risks possible. Insurance is 
used in this present section with particular reference to the definitely 
organized business of insurance, e.g., fire insurance, etc. 

Questions 

1. Why do people insure against risk? What is the service 
performed by an insurance company? Does it decrease risks? 
Is insurance productive? 

2. What determines the premium paid for insurance? 

3. At the time of the coronation of King Edward VH London 
tradesmen took out insurance against his death. Why ? Is such a 
service of benefit to society? 



I02 OUTLINES OF ECONOMICS 

4. Does insurance, such as fire insurance or plate-glass insurance, 
enter into the cost of i)roduction ? 

5. Suppose that a certain corporation owns 500 buildings each 
worth $100,000; that to insure in an ordinary company would cost 
the corporation $250 a year on each building; and that the corpora- 
tion is convinced that by an expenditure of $10,000 the fire loss can 
be reduced to an average of one building every three years. Would 
it pay the corporation to insure in an insurance company ? — T. 

6. Is the number of fires Hkely to be increased by the fact that 
buildings are insured ? 

7. In some cities the fire-insurance companies contribute heavily 
to the maintenance of fire departments. Is this properly a part of 
the insurance business ? 

8. One insurance company has insured buildings pretty generally 
throughout the country; another has confined itself exclusively to 
a certain city. With which would you prefer to insure your property, 
and why ? 

9. Insurance, Hke speculation, has sometimes been Hkened to 
betting. I pay $36 to a certain company; if my house burns down 
within three years, the company pays me $3,000. This means, in a 
certain way of thinking, that I bet $36 against $3,000 that my house 
will burn down. Is this a proper view of the situation ? If I were a 
gambler by disposition, would I be likely to insure my house? 

10. Is it possible for manufacturing concerns to unite, apply fire 
protection scientifically, exclude those who will not protect, and reduce 
fire losses to a minimum ? Is that an advantage to society ? 

11. Why are there no insurance companies that undertake to in- 
sure producers against price fluctuations ? 

12. Why should not insurance companies undertake to bear the 
risks of business and to pay (or charge) to entrepreneurs a fixed 
annual sum in commutation? 

3. General Questions on Profits 

The student should keep in mind the fact that the subject of 
profits covers losses as well as gains. Differences in profits are not 
simply the difference between a large profit and no profit, but also 
the difference between a large profit and a heavy loss. 

Questions 

1. Do profits tend to an equilibrium as between different indi- 
viduals ? different occupations ? different places ? 

2. It is said profits and losses in a given industry tend to balance 
each other. Is this true of gold mining? 



THE DISTRIBUTIX'E PROCESS 103 

3. Are differences in profits due more to skill and ability than to 
chance ? 

4. Are the profits of a business man a good measure of his service 
to society in the production of wealth ? 

5. Do profits enter into cost of production ? 

6. If an industry were generally depressed, but one employer were 
by exception making high profits, what rate of wages would he psLy ? 
If industry were prosperous, but one were by exception making no 
profit, what rate of wages would he pay? 

7. After a change in industrial methods which greatly increases 
l^roductive capacity, profits are commonly no greater than before; 
yet after all we depend on the self-interest of the entrepreneur and 
his desire for profit to secure both (a) the introduction of better methods 
and (b) their maintenance after introduction. Explain how this 
can be. 

8. In what way will a sudden depreciation of the currency affect 
profits ? a sudden appreciation ? 

9. ''Profits as a return for risk is nonsense. We know that many 
men engage in industry because they love independence and delight 
in risks. They would engage in industry even if there were no return 
to risk." Comment. 

10. ''There is a tendency for competitive profits to disappear." 
Do you agree ? 

11. "Monopoly profits are more likely to be permanent than 
competitive profits." Do you agree? 

12. "Profits are analogous to rent in that the skilled risk-taker 
gets a differential return over the risk- taker of ordinary capacity." 
Why or why not? 

13. "In a new industry profits really arise from the fact that the 
other factors of production are more productive in that industry, while 
the enterpriser is able to secure them at the old rate." Do you agree ? 
If all industries were to become of this class would the return to the 
other factors remain at the old level ? 

14. "The enterpriser is the residual claimant of industry." What 
does this mean ? Do you agree ? 

15. "Profits are a great factor in promoting economic progress." 
" Profits are unnecessary. These gains should go to the other factors 
of production." With which statement do you agree? Does it 
make any difference whether the profits spoken of are monopoly 
profits or competitive profits ? 

16. What definition of profits do you accept? Does the law of 
demand and supply operate here ? 



F. PUBLIC FINANCE AND TAXATION 

I. The Forms of Public Expenditure 
II The Sources of Public Revenue 



I. The Forms of Public Expenditure 

Questions 

1. Draw up a classified list showing the more important items of 
expenditure of the federal, state, and local governments in the United 
States. 

2. Why should the following facilities and services be provided by 
the government rather than by private persons: military defense; 
police; administration of justice; postal service; roads; lighthouses; 
parks and playgrounds; sanitation; asylums; poor relief; protection 
against fire; libraries; museums; street-lighting? 

3. From a purely selfish viewpoint is it to the advantage of par- 
ticular individuals to avoid the payment of taxes? Would it be 
advantageous if everyone avoided taxation ? 

4. If the government renders services which are greater in pro- 
portion to the money spent than individuals could procure for them- 
selves, why should the poor be exempt from contributions to the 
support of government ? 

5. Should government expenditures be absolutely small, or merely 
small in relation to the benefits to be secured ? 

6. Are public expenditures in general, at the present day, increas- 
ing in scale ? in range ? Why ? 



II The Sources of Public Revenue 

1. Public Loans 

2. Public Domain 

3. Public Industries and Investments 

4. Fees and Assessments 

5. Taxation 

104 



PUBLIC FINANCE AND TAXATION 105 

1. Public Loans 

By borrowing, a government may utilize unemployed private 
capital in meeting extraordinary needs for expenditures too great 
to be paid from the ordinary public revenues. The burden of the 
loan can thus be distributed over a series of years by payments for 
interest and sinking fund. Such borrowing may become an abuse 
if it results in pledging the income of the future for merely present 
benefits. It is justifiable in the adjusting of slight temporary deficits, 
and also (i) as a means of tiding over some great emergency, or (2) 
to provide for government investments on capital account from which 
is expected to result either (a) a definite income sufficient to cover 
the interest and the ultimate repayment of the principal of the loan, 
or (b) a real and lasting, though less tangible, benefit accruing in the 
future. 

Questions 

1. A municipality sells bonds (a) to build a schoolhouse; (b) 
to install a system of sewers; (c) to construct waterworks; (d) to 
provide a public display of fireworks on the Fourth of July. Which 
of these transactions meet your approval ? 

2. Are the Panama Canal bonds a legitimate source of public 
revenue ? 

3. On what grounds can you justify the bond issues of the United 
States during the Civil War? 

4. When a government issues paper money in the form of notes 
redeemable in gold on demand is it borrowing? 

5. What are the advantages or disadvantages of note issue as 
contrasted with bond issue for purposes of public finance? Do 
the circulating notes bear interest ? Are they sure to be ultimately 
presented for payment ? 

6. During the latter part of the Civil War the United States 
government issued large quantities of greenbacks in exchange for 
supplies bought at the high prices then prevaihng as a result of the 
inflation of the currency by previous issues. Subsequently the govern- 
ment has been redeeming the greenbacks in gold in times of much 
lower prices. Was the transaction wise ? 

7. The Cleveland administration, at the time of the currency 
troubles of 1893, resorted to the sale of bonds and paid out the pro- 
ceeds in redemption of the greenbacks and treasury notes which w^ere 
being presented for payment. This expedient has been much criti- 
cized. Do you think it was appropriate ? 

2. Public Domain 

The public domain, which was an important source of revenue 
in feudal times and in monarchies w^hich preserved the usages of 



io6 OUTLINES OF ECONOMICS 

feudalism, yields little income in the United States. This is due to 
the fact that here the general policy has been to grant public lands, 
etc., on easy terms to private owners, rather than to exact payment 
for their use. Possibly the charging of royalties for the use of timber 
and mineral lands and for water powder may become more prevalent. 
At present the revenue thus derived is so slight as to be unimportant 
especially in view of the expenses of maintaining the public domain. 

3. Public Industries and Investments 

The primary purpose of governmental industry may be (i) to restrict 
the use of certain commodities, as opium, alcohol; (2) to render 
improved service; (3) to maintain a so-called fiscal monopoly. In 
the first and second cases revenue is more or less incidental; in the 
third the expectation of revenue is the dominant motive. 

Questions 

1. What forms of public industry are maintained in this country, 
and what is the reason for state control in each case ? 

2. Is the government mail service either fiscal or restrictive in 
character ? 

3. What is the purpose of the tobacco monopoly of the French 
government ? 

4. Fees and Assessments 

A fee is a contribution exacted from a person (natural or corporate) 
to defray in part or in full the expense involved in a specific service 
rendered him by the government: e.g., the fees in connection with 
court proceedings, with the issue of certificates of various sorts, or 
with special facilities rendered by public educational institutions. 

A special assessment is a compulsory contribution levied upon 
persons who are assumed to derive particular benefit from some public 
faciUty or service provided primarily for the general good: e.g., 
assessments for betterments levied on owners of property abutting 
on streets which are widened, paved, etc. 

Questions 

1. Do the fees incidental to litigation interfere with the proper 
administration of justice ? 

2. Would litigation be more prevalent and prolonged if all the 
expenses were borne by the government without the charging of 
fees ? Would this promote justice ? Would it be economical ? 



PUBLIC PINANCE AND TAXATION 107 

3. Is it desirable or fair to make the peaceable members of a 
community pay for the contentions of the litigious ? 

4. Do you know of cases in which the fees collected by public 
officials have exercised a demoraHzing influence in poHtics ? 

5. Is special assessment an appropriate method of paying for 
improvements in a street (a) if the abutting property owners desire 
the improvement ? {b) if they oppose it ? 

6. Do you know of cases in which special assessments have taken 
the form of exploitation of property owners for the benefit of the 
contractors who were given the job ? 



5. Taxation 

a) Canons of Taxation 

b) Forms and Incidence of Taxation 

c) Tax Reform 

"A tax is a general compulsory contribution of wealth collected 
in the general interest of the community from individuals or corpora- 
tions by an exercise of the sovereign powxr of government, and levied 
without reference to the great benefits which the individual con- 
tributors may derive from the public purposes for which the revenue 
is derived." — U.S. Census Report on Wealth, Debt, and Taxation. 

a) Canons of Taxation 

I. The Principle of Benefit 

ii. The Principle of Ability or Faculty 

Taxation is the principal source of public revenue, yielding in 
this country about three-quarters of the total revenue of the govern- 
ment. Consequently it is of the greatest importance to devise a 
system of taxes which shall be in the highest possible degree efficient 
and equitable. SimpUcity, stabiHty, convenience and economy in 
collection, with the largest possible yield, are criteria of a good tax. 
The justice of different forms of taxation is tested by certain canons 
or principles of which the most important are considered below. 

i. The Principle of Benefit 

Questions 

I. Would it be equitable (a) to tax German subjects in order to 
enlarge the British navy? {b) to tax citizens of California to build 
roads in New York ? (c) to tax the citizens of the United States in 
general to deepen the harbors of coast cities ? (d) to impose a protec- 
tive tariff which raises prices throughout the country for the benefit 



io8 OUTLINES OF ECONOMICS 

of a local industry ? {e) to tax the rich for the support of poorhouses ? 
(/") to tax the childless for the maintenance of pubUc schools ? 

2. Should you agree that individuals should not be forced to 
support public activities from which they do not consciously benefit 
or that the burden of a given tax should be distributed in proportion 
to benefits received? 

3. If taxation were regulated exclusively according to the principle 
of benefit, would taxes differ from fees ? 

4. Is it proper for the state to care for needy citizens? If so, 
who is to pay? 

5. How could one determine how much a given citizen was bene- 
fited by the construction of a "Dreadnought" ? by the maintenance 
of the Supreme Court of the United States ? 

6. Do the rich or the poor benefit more by the activities of govern- 
ment? Who is the more dependent on government: the man with 
much to gain or the man with much to lose ? 

ii. The Principle of Ability or Faculty 

Questions 

1. Can it be maintained that the well-to-do should pay more than 
the poor on any of the following grounds: (a) Because the poor have 
a right to be supported by the wealthy ? (b) Because the possession 
of wealth is prima facie evidence that the possessor has enjoyed 
special benefits as a result of living under the government which he 
is asked to support? (c) Because on ethical grounds one should 
sacrifice himself for others as far as possible? 

2. Is taxation according to ability a penalty on attainment and a 
premium for sloth ? 

3. What is the test of ability to pay? Is abiUty proportional to 
income ? to property ? Is it measured by excess of possessions above 
a minimum regarded as indispensable? 

4. Are indirect taxes inequitable in that they raise for all persons 
alike the cost of necessities of life ? 

5. Is equality of sacrifice a satisfactory criterion of the justice 
of taxation ? 

b) Forms and Incidence of Taxation 

i. The General Property Tax 

ii. Customs Duties 
iii. Excise Taxes 
iv. Income Taxes 

v. Inheritance Taxes 
vi. Corporation and Business Taxes 



PUBLIC FINANCE AND TAXATION log 

i. The General Property Tax 

Questions 

1. Is the general property tax equitable? Is it effectual? 

2. Who bears the burden of {a) an established tax on land; {b) 
a newly imposed tax on land; (c) a tax on old buildings; {d) a tax 
on new buildings? 

3. Should real property and personal property be subject to the 
same sort of taxation ? 

4. What advantages has a high tax rate on a low assessment over 
a low rate on a high assessment? 

5. Would a low rate of taxation on intangible personal property 
bring in more than a high rate ? Why ? 

6. It is contended that the general property tax, by making it 
relatively unprofitable to hold landed property, encourages exhausting 
cultivation, slaughter of timber lands, and exploitation of natural 
resources in general. Explain. 

ii. Customs Duties 

Questions 

1. What advantages does a system of customs duties offer as a 
means of raising revenue ? 

2. Would customs duties be a satisfactory source of revenue for 
the United States in time of war with a great naval power ? 

3. Make a list of the disadvantages of a system of customs duties. 

4. Should customs duties for purpose of revenue preferably be 
imposed on necessities or on luxuries ? On goods with an elastic or 
on goods with an inelastic demand ? 

5. Is a protective tariff an economical method of taxation ? 

6. Mention five commodities on which import duties for purpose 
of revenue would in the case of this country be especially appropriate. 

7. Distinguish between specific and ad valorem duties. Mention 
a commodity on which a specific duty would be the better. Mention 
a commodity on which an ad valorem duty would be preferable. 

8. Who bears the burden of a revenue tariff ? 

9. Who bears the burden and w^ho gets the benefit of a protective 
tariff {a) in so far as the taxed commodities are chiefly imported? 
{b) in so far as the taxed commodities are chiefly produced within 
the country? 

iii. Excise Taxes 

Questions 

1. Define excise taxes. 

2. What advantages does a system of excise taxes offer as a means 
of raising revenue ? How are excise taxes collected ? 



no OUTLINES OF ECONOMICS 

3. State the disadvantages of a system of excise taxes. 

4. For purposes of revenue is it better that excise and customs 
taxes should be levied on the same or on different commodities ? 

5. Do excise taxes discourage home industries and favor the foreign 
manufacturer ? 

6. Should excise taxes preferably be imposed on necessities or on 
luxuries ? What is the practice in this respect in the United States ? 

7. Are excise taxes in this country imposed strictly for fiscal 
purposes? May they be regarded as sumptuary laws, either in 
effect or by intention ? 

8. Who bears the burden of excise taxes ? 

iv. Income Taxes 

Questions 

1. What has been the chief obstacle to a federal income tax in 
the United States? Has this obstacle prevented state taxation of 
income ? 

2. What has been the chief obstacle to effectual administration 
of state income taxes? Would this difficulty have the same force in 
the case of a federal income tax ? 

3. What is taxation of income at the source? 

4. For purposes of fiscal administration could income be satis- 
factorily defined? Does income include increase in the value of 
property ? 

5. Should income taxes be progressive? Should incomes below 
a certain amount be exempt from taxation ? 

6. Who bears the burden of an income tax ? 

7. Are income taxes in harmony with the principle of abiUty? 
with the principle of benefit ? with the principle of equal sacrifice ? 

v. Inheritance Taxes 

Questions 

1. Should inheritance taxes be progressive? If so, should the 
progression be based on the amount of the estate, the amount of 
the specific inheritance, the amount of the previous property of the 
heir, or the degree of kinship ? 

2. How high a rate should you approve in taxation of inheritances ? 
Has anyone a right to inherit ? to unrestricted inheritance ? 

3. What inconveniences result from the separate administration 
of inheritance-tax laws by the several states ? 

4. Is it proper to tax an inheritance in more than one state? 
Is the tax in practice to be paid in the state of the testator, of the 



rUBLIC FINANCE AND TAXATION iii 

beneficiary, of the location of the property, or of the trustee under ihc 
will ? 

5. Who bears the burden of an inheritance tax? Is the burden 
according to benefit ? according to abiUty ? 

vi. Corporation and Business Taxes 

Questions 

1. Who really pays a tax levied on {a) the granting of a corpora- 
tion charter? ib) the property of a corporation? {c) the franchise 
privileges of a public service corporation ? 

2. Is the value of a franchise an unearned increment? Should 
the total income attributable to the special privilege of the franchise 
be absorbed by taxation ? Would such taxation be confiscatory ? 

3. What is the best test of the taxable value of a business? 

4. Is a high-Kcense tax on saloons a desirable form of taxation? 
Why ? Who bears the burden of the tax ? 

c) Tax Reform 

Questions 

1. Distinguish between direct and indirect taxes. Is the dis- 
tinction of importance in economics ? in United States constitutional 
law ? 

2. Of the several forms of taxation which have been discussed, 
which, in this country, are primarily employed {a) by the federal 
government ? {b) by the states ? (c) by local governments ? 

3. Of our present forms of taxation which are likely to increase and 
which are likely to decline in importance with the progress of scientific 
reforms ? 

4. Is the need of government revenues increasing? Will taxa- 
tion in the future be depended upon for larger resources than at 
present ? Would a heavier burden of taxation furnish an incentive 
to tax reform ? 

5. Is the benefit theory or the ability theory of taxation the more 
acceptable at present ? Does the movement toward larger functions 
of government indicate a growing belief in one of these theories rather 
than in the other ? If so, w^hich seems to be gaining ground ? 

6. Is a thoroughly good system of taxation attainable in this 
country without amendment of the Constitution of the United States ? 
Do you expect such an amendment ? 



G. SOCIAL REFORM 

I. Criticisms of the Present Industrial Order 
II. Remedies Which Have Been Suggested 
III. Suggested Ideals of Distributive Justice 

Up to this point, the study of industrial society has been con- 
fined almost entirely to a study of things as they are — to an analysis 
of the present structure with but little reference to proposed changes. 
Many criticisms have been made on the present industrial order 
and many modifications of that order have been suggested. Some of 
these suggested modifications amount to revolution. Having made 
an analysis of things as they are, we are in a position to examine the 
criticisms which have been made and the remedies which have been 
advocated. 

I. Criticisms of the Present Industrial Order 

1 . Economic Defects 

a) The Defects of the Productive Process 

i. The Wastefulness and Duplication of Effort 
ii. The Artificial Stimulation of Wants 
iii. The Carelessness in Conserving Human Energy 
(i) Unemployment 

(2) The Voluntarily Idle 

(3) Industrial Accidents and Diseases 

iv. The Adulteration of the Product. Salability, not 
Serviceability, the Test Applied 

b) The Defects of the Distributive Process 

i. The Great Inequalities in Possessions and Incomes 
ii. The Unfortunate Situation of the So-called Lower 

Classes 
iii. The Results in Checking Social Development, and 

Possibly Even in Checking Production 

2. Resulting Social and Political Defects 

a) Corruption and Favoritism in Government 

b) MiUtarism 

c) Vice and Crime 

3. Difficulty (impossibility?) of Remedying These Evils under the 
Present System 



SOCIAL REFORM 113 

Questions 

1. Mention two cases of each of the above-mentioned defects of 
the productive process. 

2. The investigators of the Pittsburgh Survey found that indus- 
tries in the Pittsburgh district had resulted in 526 deaths from accident 
in one year. Is this due to defects of the present industrial system ? 

3. Is non-competitive enterprise free from waste and duplication 
of effort ? 

4. Is wastefulness an advantage in competitive industry ? Could 
it be maintained that the stimulus of competition prevents waste 
more than it causes waste ? 

5. Which is the greater danger: that competitive industry will 
stimulate excessive and artificial wants, or that non-competitive 
conditions will result in neglect to provide for wants already felt ? 

6. How can it be argued that defects in distribution harm pro- 
duction and social development ? 

7. Are the rich growing richer and the poor growing poorer? 

8. Is the control of wealth ever confused with the ownership of 
wealth in discussing the great fortunes of today ? 

Q. Does the inducement to pohtical corruption for individual 
advantage exist only where industrial conditions are professedly 
individuahstic ? 

10. With what justice can the prevalent social and political defects 
be charged to the industrial situation ? Does the mere fact that 
defects exist condemn a system ? Is any system likely to be free 
from defects ? 

11. Make a list of forms of vice and crime which are fostered by 
the present industrial system, and show their relation to such causes 
as exhausting conditions of work, unemployment and want, chronic 
poverty, tenement and lodging-house conditions, etc. 

12. Judging from what you know of the way in which development 
of any kind takes place, does it seem to you likely that one could 
reason out a system which would prove more efficient in production 
than one which has actually developed through decades? Do you 
think it reasonable to expect any sudden change in the characteristics 
of the factors of production ? 

13. When we speak of the economic inequalities of today do we 
mean inequalities of property or of income ? 

14. "There can be no real political democracy without industrial 
democracy." What does this mean? 

15. Cite cases where fraud has been one of the forces in the present 
distributive process. 

16. Does the present system seem to you to be mainly good with 
some defects, or mainly bad with some good points ? 

17. Make out a list of the good points of the present system. 



114 OUTLINES OF ECONOMICS 

II. Remedies Which Have Been Suggested 

1. Individual Reform — the development of different ideals 

2. Social Reform 



1. Individual Reform 

a) The Agencies of Individual Reform 

b) The Significance of Individual Reform 

Questions 

1. If all men were actuated by high ideals would it make much 
difference what the industrial system was ? Should we do better 
to bring our attempts at reform to bear upon the individual, or upon 
the system ? 

2. Mention professions whose representatives are engaged pri- 
marily in reforming individuals. Mention other professions whose 
representatives are engaged primarily in reforming the social system. 

3. Do you think that individual reform would react upon social 
reform? Do you think that social reform would react upon indi- 
vidual reform ? 

4. How can a person with good ideals make up his mind whether 
he should engage primarily in movements making for individual 
reform or in movements making for social reform ? 

2. Social Reform 

a) Reforms Involving No Vital Change in the Present Order 
h) Reforms 'Practically Amounting to Revolution 



a) Reforms Involving No Vital Change in the Present Order 

i. Reforms Implying an Initiative from the Class Hoping to 
Be Benefited 
(i) The Trade Union Movement with Its Accompanying 

Policies 
(2) Co-operative Enterprises 
ii. Reforms Im])lying an Initiative from Other Classes 
(i) Profit-Sharing 

(2) Philanthropic and Charitable Enterprises 
iii. Reforms Implying a Measure of Governmental Regulation 
(i) Readjustment of the Burdens of Taxation — the Income 

Tax; the Inheritance Tax 
(2) Educational Facilities, e.g.. Trade Schools 



SOCIAL REFORM 115 

(3) Workingmen's Insurance and Old-Age Pensions 

(4) Regulation of the Conditions and Terms of Labor, e.g., 
Factory Inspection and Eight-Hour Laws 

(5) Direct Aid to the Needy — Poor Relief 

(6) Miscellaneous Municipal Activities, e.g., Housing Laws, 
Public Parks, etc. 

Questions 

1. Which is likely to have greater success, producers' co-operation 
or consumers' co-operation (so-called) ? Why ? 

2. Do you think that labor unions are likely to look with favor 
u|)on profit-sharing ? Why ? 

3. If you were to select some particular form of profit-sharing, what 
would it be ? Why this particular form ? 

4. Do you expect that either profit-sharing or co-operation will 
become general in the United States ? 

5. Cost of living is high. Would it be wise for a certain class of 
people (say college teachers) to form co-operative societies to secure 
their household provisions? What factors would make for success 
in such a venture ? What factors would make for failure ? Would 
it be apt to succeed better if membership were confined to one class 
of society? 

6. Should the efforts of philanthropy and charity be directed more 
toward alleviation or toward prevention ? 

7. Which man renders the greater service, the soldier in the army 
or the worker in industry ? Which more deserves a pension ? Do you 
think that the United States should have a system of workingmen's 
insurance against sickness, accident, old age, and death ? 

8. Suppose that sick benefits, old-age pensions, etc. (if provided 
for) raise the prices of goods to the consumer. Do you think this 
is fair to the consumer who does not receive such a benefit or pension ? 

9. Is there more cause for inspection, regulation, etc., in industry 
than there w^as 150 years ago? Exactly why? Does the fact of 
more regulation prove that we are drifting into socialism ? 

ID. Should the burden of workingmen's insurance be carried by 
the employer or by the state ? Why ? 

11. What is meant by "employers' liability" ? 

12. Is there any element of co-operation in the present order? 
If so, w^hat kind? 

13. What is meant by fraternal insurance? compulsory thrift? 
housing legislation? 

14. Is the right of inheritance a natural, inherent right? Is 
primogeniture ? Give arguments for and against the right of inherit- 
ance. Give arguments for and against the right of bequest. 



ii6 OUTLINES OF ECONOMICS 

15. What are the grounds for labor legislation protecting women 
and children? Do these reasons hold equally well for such legisla- 
tion for the protection of men ? 

16. Why is it more difhcult to get suitable factory legislation in 
the United States than in England? 

17. What is the "sweating" system? What are its chief evils? 

18. In what industries is the sweating system most prevalent? 
How can its evils be eliminated ? 

19. Name five trades or occupations that are especially dangerous 
to workers. Should the state pass special legislation to protect 
the workers in such occupations ? 

h) Reforms Practically Amounting to Revolution 

i. Land Nationalization (dealt with under Rent) 
ii. Anarchism 
iii. Communism 
iv. Socialism 

(i) The Socialist Philosophy as Exemplified in 
(a) Utopian Socialism 
ih) Christian Socialism 
(c) State Socialism 
{d) Marxian Socialism 

(i) The Materialistic Conception of History 
(ii) The Marxian Theory of Exploitation 
(iii) The Doctrine of Capitalistic Contradictions, e.g., 
Crises, Concentration of Capital and Industry, 
Progressive Misery, Development of the Pro- 
letariat 
(iv) The Class Struggle and the Social Revolution 
(v) The Co-operative Commonwealth 
(2) The Socialist Movement 
{a) The SociaHstic Program 
ih) The Organization and Size of the Movement 
(c) The Aids and Hindrances to the Movement 

Questions 

1. Work out carefully the distinction between socialism, com- 
munism, and anarchism. 

2 . Can you cite cases where economic conditions have determined, 
men's views on morals, politics, philosophy, rehgion, etc. ? 

3. Do economic conditions determine these other factors, or do 
the latter determine economic conditions? 



SOCIAL REFORM 117 

4. Do political parties represent the economic interests of con- 
tending groups of people ? 

5. Suppose it is established that labor is exploited by the emj)loy- 
ing class. Does that prove the Marxian theory of value and wages ? 
Would there be any other remedy possible save socialism ? 

6. Is there a class struggle in the United States today ? 

7. Is there a growing concentration of wealth in the hands of the 
few^ ? If so, why is this unfortunate ? Is the concentration movement 
inevitable in all industries ? If it is, is socialism the only remedy ? 

8. Is sociaHsm to be judged by its ideal or by its probable workings ? 
Do you think one should commit himself to socialism because its 
ideals are high ? Are the ideals of the competitive system lower ? 

9. Draw up a list of difficulties which you think the co-operative 
commonwealth would experience. 

10. Do you think anyone is sufficiently wise to predict the course 
of human development for the next one hundred years? Should 
you take the stand that any set program for the future is unwise ? 

11. Do you think that all the evils of today are due to any one 
cause ? Do you think there is any one cure ? 

12. Does the present system stand committed to the continuance 
of present evils ? 

13. Do you think it possible for a government representing the 
workers to take over one great industry after another and to operate 
these great industries for the common welfare rather than for profits ? 

14. Suppose socialism were realized. What would be the effect 
upon rent? interest? profits? wages? Would there be anything 
corresponding to these shares ? Would the underlying facts of pro- 
duction be altered ? 

15. In a collectivist state would the worker have any more free- 
dom than he has today ? 

16. It has been said that progress impHes the elimination of the 
"mere muscle man." Do you agree? Is his case becoming steadily 
worse under the present system? If so, would sociaUsm continue 
that tendency? 

17. Does the sociaHst urge equal distribution of wealth? 

18. Many people are in reaction against the materiaUstic, mer- 
cenary tendencies of the present order. Is sociaHsm materiaUstic? 
Does it appeal to mercenary motives ? — T. 

19. The sociaUsts deny they would have a "dead level " society. 
They would permit inequalities of incomes and of possessions. Why 
do this? When they do this do they concede the usefulness of 
many of the motive forces of the present order? Do they retain 
many of the temptations of the present system? Will greed, com- 
petition, selfishness, and envy disappear under their scheme? 



ii8 OUTLINES OF ECONOMICS 

20. Would the necessity of taking industrial risks disappear under 
socialism ? If not", who would be the risk-taker ? Would it be done 
more wisely than under the present system ? 

21. Would the necessity of saving disappear under socialism? If 
not, who would do the saving and how ? Would it be done more 
wisely than under the present system ? 

22. "We do not consent to honor the employing class with the 
splendid title of laborers because their whole effort is to devise ingen- 
ious and pleasing methods of subtracting their own subsistence from 
the earnings of the people." Does the ordinary employer labor 
in the ordinary sense of the word? — T. 

23. " This bill is socialistic. It is based upon the acknowledgment 
of the supremacy of the state over property rights." Is this a 
correct test of what is socialistic ? — T. 

24. Is there a presumption in favor of state interference or against 
it ? Is each case to be decided on its merits ? 

25. What are the main planks of the platform of the socialist 
party in the United States today ? Is everyone who approves of any 
or even most of these planks a sociaUst? 

26. Draw up a statement of the forces making for socialism in the 
United States today. Draw up a statement of the forces militating 
against socialism. 

III. Suggested Ideals of Distributive Justice 

1. The Aristocratic Ideal 

2. The Communistic Ideal 

a) To Each According to His Wants (desires ? or needs ?) 

b) To Each an Equal Share 

3. The Socialistic Ideal 

a) To Each According to His Labor 

b) To Each According to His Services to Society (presumably 
to be determined by a government bureau) 

4. The Competitive Ideal 

a) To Each According to His Services to Society 

i. Measured in Terms of UtiUty and Not of Effort 
ii. Evaluated Not by Public Officials but by Judgment of 
Those Receiving the Service 

b) The Propositions Underlying This Ideal 

i. Each Individual of Mature Age and Sound Mind Knows 
His Own Interest Better Than a Body of Officials Can 

ii. Each Individual, if Left to Himself, Will Pursue His 
Own Interest 



SOCIAL REFORM 119 

iii. All Harmful or Non-serviceable Methods of Pursuing 

This Interest Should Be Closed 
iv. The Individual's Well-being Will Then Depend upon the 
Amount of His Service to Others, Whence a Great 
Stimulus to Service 
V. No Hampering of Altruistic Motives. There is, How- 
ever, a UtiUzation of Selfish Motives. 
Note the substantial agreement of the stated ideals of the com- 
petitive and sociaHstic systems. They differ in the policy advocated 
to attain these ideals. 



Questions 

1. Should an unjust system of distribution endure? Is it likely 
to do so ? What do you mean by unjust ? 

2. Do any of the following illustrate the aristocratic theory: 
primogeniture, right of inheritance, the closed shop, a caste system ? 

3. Can you think of any defense that might be made for the aris- 
tocratic theory as appHed in an early civiUzation ? 

4. Can you construct any scheme by which each could have accord- 
ing to his needs ? according to his wants ? 

5. All men are brothers. Should not there be equal sharing? 
If not, defend any other plan. 

6. Suppose one were to accept the ideal '^to each according to his 
labor." Does this mean physical labor, sacrifice, labor time, or 
results accomplished? 

7. Does not the present system reward according to the signifi- 
cance the service possesses to particular individuals and small 
classes ? May this not put a premium upon trivial or even immoral 
things ? Would it be better to let a government bureau adjudge the 
worth of the service ? How is this bureau to arrive at its standards ? 
How apply them ? 

8. Do you see any difference between saying things ought to be 
thus and so and saying that the state should at once proceed to make 
things thus and so ? 

9. Does the competitive ideal seem to you harder to attain than 
the others ? Is it good policy to utilize both selfishness and unselfish- 



ness 



10. Which is more important, approximate equality of posses- 
sions or approximate equality of opportunity ? Do we have to destroy 
the present order to secure the latter? 

11. With a more general diffusion of knowledge, culture, publicity, 
etc., is political democracy in more or less danger? Is equality of 
opportunity more or less likely to ensue ? 



I20 OUTLINES OF ECONOMICS 

12. Do you think that the indictments of the present order by 
men who are the results of this order indicate anything as to the 
possibiHty of improvement under the present system ? 

13. What real difference is there between the stated ideal of social- 
ism and the stated ideal of the competitive system ? 



